Q1 2023 Computer Task Group Incorporated Earnings Call
Good morning, and welcome to the CTG first quarter fiscal year 2023 financial results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star can you call. It zero. After today's presentation, there will be an opportunity to ask questions to ask a question.
You May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Craig Mahalik Investor Relations. Please go ahead.
Yeah. Thank you and good morning, everyone. We certainly appreciate your time today and your interest in CTG.
Joining me our fleet today are president and CEO , and John Rob Acker, Our Chief Financial Officer.
We released our first quarter 2023 financial results. This morning before the markets opened you can access the release at our website at CTG dotcom.
After a sleep and John's formal discussion. This morning, we will open the line for Q&A.
Just let me 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 and uncertainties and other factors are provided in the earnings release as well as with other documents filed with the Securities and Exchange Commission. These documents can be found on our website or at SEC Gov.
During today's call will also discuss non-GAAP financial measures, which we believe are useful in evaluating our performance you.
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 our SEC filings.
I'll now turn the call over to Felipe to begin weight.
Thank you, Greg and good morning, everyone.
We appreciate you joining us today.
During the first quarter, we continued to drive our transformation strategy.
He works to make CTG pure play E solutions.
Our digital solutions and services business now accounts for more than 80% of the total revenue mix.
Despite the difficult macroeconomic environment.
Our pipeline continues to be strong.
And we achieved IP solutions and services bookings near $100 million into court.
Including one projects totaling $20 million in revenue.
Expect it to be earned over two years.
I, thank our employees for their hard work and of course.
We are pleased to meet all our progress and we.
We remain focused on accelerating our efforts in delivering for our clients and shareholders.
We saw some additional encouraging signs in the court.
For example, one area of focus is our software engineering services.
Which includes designing testing operating.
I'm seeing digital simple excellence.
We generated more than $100 million in revenue from these services last year.
We're off to a strong start in 2023.
More than $30 million in revenue in the first four.
Yeah.
Importantly.
Our changing business mix has led to a step change in our gross margin broke.
Which increased 430 basis points over the past two years on a consolidated basis.
Further highlighting the potential of our business model was the performance in our North America, <unk> solutions and services segment.
Which achieved gross margins of 38, 7% in the quarter.
Our 510 basis points from a year ago.
610 basis points over a two year period.
Do you attribute this performance to our focus on driving digital solutions, including software engineering services, which yielded a gross margin of nearly 32% in the quarter.
As well as contributions from our recent acquisition.
Overall, the Alleviant integration has gone exceptionally.
And this past quarter a highlight it's an excellent example of the sales synergy potential of the <unk>.
Acquisition.
We won a sophisticated digital I E solutions engagement.
For our North American clients, whereas the services will be primarily provided by leaving empty.
Using our offshore more.
While we have been doing some work for this client previously.
What we categorized as non strategic stocking that.
The new capabilities and talent of the Alleviant team helped us secure this new business.
Over time, we look forward to driving sales synergies and delivering even greater value for our clients.
By leveraging lower delivery costs.
<unk> profitability.
We are approaching this year with conviction in our strategy.
We made investments during the quarter to further expand our North America sales solutions and marketing teams.
While these investments reduced our operating margin in the quarter.
We continue to take a long term approach to ensure we are positioned for accelerated growth and profitability in the future.
Looking ahead, we remain focused on what we can control.
On solution innovation being a top tier place to work.
Cultivating relationships.
To improve our mix in an effort to drive our earnings power.
Given the significant new projects and overall strong bookings level during the recent quarter.
We now anticipate delivering more than 10% growth in the it solutions and services segments during the upcoming second quarter when compared to last year.
This performance is also driving improved mix for the full year.
Sean will discuss in more detail.
Before I turn the call over to John .
I would like to reiterate that the board and management are always focused on enhancing shareholder value.
Regularly review, our strategic planned priorities and capital allocation.
To highlight our transformation strategy.
We continue to deliver higher mix of digital solutions and services.
Focus on software engine.
While thoughtfully disengaging from nonstrategic staffing services.
To improve our financial profile.
As you know by the end of 2020 suite, we expect to deliver 7% adjusted EBITDA margins.
Completing what we considered the first phase of our transformation.
Importantly, this is just so much.
The end destination.
For the second phase, we expect to achieve 10% adjusted EBITDA margins by the end of 2021.
With the support of the board.
All of our management team embarked on this mission in 2000 and Nike.
Because through this transformation, we expect to drive a re rating in our multiple and create significant shareholder value.
With that let me turn it over to John <unk>.
Our results in more detail.
Sure.
Yeah.
Thank you Felipe and again good morning, everyone.
Thank you for joining us on today's call.
Consolidated revenue in the first quarter was $78 2 million.
Change in revenue year over year reflects our continued shift to a mix of more solutions and services based business.
And the intentional disengagement of 11 6 million from our lower margin Nonstrategic technology services business during the quarter.
Of note the nonstrategic technology services segment now represents less than 20% of our total revenue mix.
Looking specifically at our it solutions and services segments North America revenue was up 13, 5%.
As we were closing new customer engagements and benefiting from the contribution from the Elian acquisition.
In Europe .
Revenue declined five 6%. However, this was largely due to a change in foreign currency exchange rates.
As Felipe noted, we achieved it solutions and services bookings of nearly 100 million in the second quarter, our second highest quarterly total in the last five years.
The consolidated gross margin was 25, 7% up 270 basis points over last year's first quarter and 430 basis points over two years ago highlight.
Highlighting the success of our continued transformation to a digital I T solutions company.
The combined North America, and Europe , I T solutions and services segments delivered a first quarter gross margin of 28, 9% up 130 basis points year over year and.
220 basis points over two years.
Fully piloted the strong margin performance with our North America, I T solutions and services segment, which saw a substantial expansion given the focus on digital solutions and contribution from Alleviant.
Europe , which has faced greater macroeconomic headwinds, including labor constraints.
Some contraction in gross margin due to the timing associated with significant mandated salary adjustments and the European countries in which we operate.
Within the European segment, we expect to see a gradual increase these margins as costs are passed along to our clients throughout the year and we benefit from improved utilization and a greater mix of digital solutions.
For the first quarter.
GAAP operating income was <unk> 7 million with a margin of 9%.
When excluding.
600000 of acquisition related expenses 500000 of ERP system implementation costs and 300000 of severance.
non-GAAP operating income was $2 1 million or two 7% of revenue.
The change from last year largely reflects the increases in acquisition related expenses offset by additional investments made in support the North America, It solutions and services segment business development efforts.
We recorded net income of 300000 or two cents per diluted share.
non-GAAP diluted EPS, excluding the previously noted cost was a pets.
The tax rate was 34% compared with 23, 9% in last year's first quarter.
Which benefited from windfalls in equity based compensation transactions.
We expect in the long term our tax rate to be approximately 35%.
We continue to maintain a strong and flexible balance sheet that can be leveraged to accelerate the pace of our growth in the future.
Cash and cash equivalents were $23 3 million at the end of the quarter.
And we had just $1 4 million outstanding on our revolving line of credit facility with no other long term debt.
Our revenue outlook range for 2023 was adjusted to an overall range of $310 million to $340 million.
We continue to maintain a midpoint of $325 million for the year. However.
However, we did adjust the anticipated revenue mix by increasing our I T solutions and services revenue to a range of 265 million to $285 million.
The outlook also now includes a reduction of 40 to 45 million in revenue from the disengagement of a non strategic technology services business given the acceleration we saw during the recent quarter.
Of note the mid point of our I T solutions and services revenue expectation is an 18% growth rate year over year, which includes a full year of revenue from alleviant and well over 10% organic growth for the rest of the business.
We expect 2023 GAAP diluted earnings per share.
It's ranged from 34 to 42 cents.
And non-GAAP diluted earnings per share to range from 56 to 64 Socs.
A reduction of two cents at the midpoint of our range from last quarter.
The GAAP EPS estimates reflect the previously announced ERP system implementation project.
However, these costs are being backed out as part of the non-GAAP EPS disclosures.
As a reminder, the total ERP project cost is estimated at 8 million to $10 million and will be largely spread over two year period.
With a completion date around the end of 2024.
As we indicated last quarter, we had expected a slower start to the year with results significantly improving in the second half of the year.
We are committed to our plan, including reducing our overall cost structure and the continued disciplined execution of our digital solutions and services strategy to drive long term shareholder value.
This completes our prepared remarks, Kate could you. Please open the call for questions.
And an answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the key to withdraw from the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question is from Kevin Liu of cable company. Please go ahead.
Hey, good morning, guys and nice job on the bookings this quarter.
Alright. That's question number one is to ask about was just the the large deal that you signed can you provide a little bit more color just in terms of what vertical. This may have been in kind of the time, you expect it to ramp to full contribution.
We expect revenue in a.
Quarterly basis to be relatively consistent once they're fully ramped.
Sure Kevin.
It's large deal was in the is in the health care.
Vertical.
And that's.
Well said that's spread over two years.
It started with the planning.
The planning phase.
At the end of at the end of last quarter and is ramping up as we speak.
We believe it's a once it's ramped up.
Probably going to stay relatively stable over a over the period of two years.
Got it that's helpful and one thing I wanted to clarify was this large deal. The one you guys. I also referencing in context of elite is delivering those services or are those kind of two separate opportunities.
And that is a separate opportunity Kevin.
The elysium opportunity our win.
It is a very interesting one because it really goes to the core of why Alleviant made such so much sense to CTG it's that.
Digital capabilities. They have it's the offshore delivery, where we can have there.
Standard model of 80% offshore 20% onshore.
That's.
It's actually a SaaS platform development team.
In a company that has to be in decline.
CTG in the non strategic business, which is encouraging that we're now selling high value high margin digital business and are in the clients, where previously we were only doing low margin stuff.
Understood. That's good to hear and then just regarding the European business, you guys talked last quarter and kind of referenced it again this quarter just the wage increases that have happened there.
How has that impacted kind of conversion of your pipeline.
As you move through Q1 and into Q2 here.
And maybe talk about how those discussions with their customers are going about being able to pass along those wage increases.
Sure.
The like you know the wage increases were abnormally high due to the extreme inflation in last year, and we are able to adjust for this in part.
Through higher bill rates at the beginning of the year roughly half of our contracts.
Some provisions built in foreign inflation adjustments.
But that's a it's very different from contract to contract. So we are adjusting its embarked and but we expect that it will take the entire year to pass through most of the costs.
On the other side, where you were asking about.
The throughput in our in our pipeline and our closing deals.
The European pipeline as the total pipeline of course.
Is strong.
So in Europe , we have been experiencing more of a high level of labor constraints.
It's not easy to fill client demands the right resources are scarce difficult to recruit difficult to grow.
And the reason why that's a harder in Europe and in the states, it's simply a function that they're more IP professionals retiring and joining the workforce out of out of universities in Belgium and Luxembourg.
Appreciate that and then just lastly for me just on the guidance you know obviously the revenue number is unchanged, but actually at the midpoint, but it does have a higher mix of <unk>.
<unk> revenue.
I just wanted to get a better understanding of why the midpoint of your earnings guidance is down slightly.
I need to just make high levels of investment sales front.
Are there other some other dynamic we should be aware of.
John do you want to take this question.
Sure. Thank you.
Kevin.
Really.
The dynamics of the guidance is were excited about increasing the.
Solutions guidance in North America, and Europe . The overall, the total and again I think our I mentioned during the call that the comparison of the midpoint of this year to our actual from last year would be an 18 point.
The 18% increase dramatic increase from where we were.
As far as the earnings guidance, we did lower that by two cents to the mid point to 60 from 62 and that's reflective of.
Two or three items, one is the pace at which we're passing through those wage rate increases to bill rate increases in our to our European clients. The.
The macroeconomic headwinds that we see in Europe are a little bit stronger now than we had seen at the beginning of the year, but lastly, we made investments in Q1, we saw an opportunity to do that are some great people came along to add to the team and the business development, whether that'd be cells solutions delivery Mark.
So we added those people we firmly believe that you've got to add the right resources to drive business to long term growth. We're excited about I'm talking about attaining 10% growth in the second quarter for the solutions business, that's something that we've been working hard towards so we made those investments and I think when you put all those pieces together that came out too.
The slight change a slight decrease in the midpoint of the earnings guidance.
Understood. Thanks for taking the questions and good luck here in Q2.
Thanks, Scott Thanks, Scott.
Okay and if you have a question. Please press Star then one the next question is from Mark where that got Sidoti. Please go ahead.
Hey, good morning.
Good morning.
So I was wondering if you could talk a little bit about the.
New engagements and in new orders and Wonder if you could sort of characterize a little bit are you beginning to see some of those.
New engagements.
From clients that are targeting cost savings efforts or are you getting a sense that they're kind of a growth driven is is there any.
Any particular concentration it seems as though cost savings would make sense at this moment I was wondering if that's what you're what you're seeing.
Sure.
We do have.
Opportunities in.
The deal close.
Clients that are looking at cost savings like what you're saying.
And it makes sense at this moment in time.
But that's not all what what was happening we still see in the digital transformation area.
A lot of companies needing to implement their strategic projects.
Changing the business model are shortening the time to market.
Changing the customer experience all of those areas in the current macroeconomic environment or even more important than that than in all of our science.
That is correct and that win together with Elysium.
It's exactly what my bad.
Like I say, it's a SaaS platform development.
The sale points.
Point of sales in.
In a in a manufacturing company.
So not related to cost savings that's related to.
<unk> implementation.
By company and say there is a.
There is.
More of one or the other we see both.
In the in the market that was small.
Okay, and then I was wondering if you're seeing much of a difference in the length of the sales cycle more recently with these with these orders or is it similar to historical pattern.
Oh, well, we definitely have more detail discussions with clients and somewhat slower decisions.
Everything to do with the global inflation.
The recessionary pressures pressures.
Hum.
But we do have or are part of the wins and that we're actually encouraged by that a high number of a.
Number of bookings our second highest in the last five years.
So we're winning.
A lot of new deals, we anticipate delivering more than 10% growth in the second quarter compared to the previous year.
So we see a very healthy pipeline.
But yes, more more detail that slow discussions.
Okay, and then switching to a different pipe, whilst we could talk a little bit of a alleviant was was was in September of last year. I was wondering if there are any thoughts as to maybe what the acquisition pipeline currently looks like in your current appetite and maybe what you're seeing from from a valuation.
Perspective.
Well, we're continuously evaluating potential acquisitions mark.
Based on our I would say almost rigorous investment criteria.
They really has to be an added value.
CTG like I said before they must be seats for growth.
Stablish profitable company.
The skill sets, we need or a customer base, we need access to and shorts.
Very synergistic.
We do have a good pipeline.
Very filter.
And we will remain prudent.
In our in our disciplined capital allocation framework.
Great and then you you were talking about the investment of adding personnel during the during the quarter and I was wondering if is there room for that to continue or or do you get the sense that you kind of got to where you want to be there.
At least in the near term.
Mhm.
Well, we saw like John said, we saw opportunities finding some great people.
Looking at our approach has always been a long term approach looking at where we can bring the business transform our business.
Digital place.
We have added significant.
The sale solutions marketing resources.
I think at this time.
Hey, if you wait is now the gravity center is now moving into integrating those people and bringing them up to speed.
I'm sure we get the returns.
We're always going to keep the pipeline for sales solutions.
Marketing people.
But at this moment, we're implementing and bringing them new forces up to speed to accelerate that growth types, we're talking about.
Yeah.
Yes.
Great and then the last one for me, it's it seemed as though there was a little.
A bit of a shift in our revenue mix I mean, you certainly have a lot of oh verticals that if it's a marketplace, where there seem to be a little bit of a shift in our in the industry vertical mix I guess, a little bit away from from technology and that's why.
Wonder if you could talk a bit about maybe what you're seeing in that overall business makes or and and maybe some of the things that you might be some areas that you might be more encouraged about than others, perhaps in the near term. Thanks.
The shift away from a technology the technology sector.
And everything to do Mark with the shift away from non strategic business, because that's where a lot of that was centralized.
That's a that's an easy answer.
Looking at the other verticals.
We see growth in the financial industry.
Government and in Europe , It is positive but not great.
Health care and in the states is under a lot of pressure generally and that's why we're so encouraged and.
I'm pleased with the large contracts that we have signed in the health care segments.
So our healthcare business isn't.
Isn't under pressure.
Great. Thank you very much.
Youre welcome Mark.
Thanks Mark.
This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
Thank you for participating in our teleconference today.
And as always please feel free to reach out to us at any time.
Look forward to talking with all of you again.
After our second quarter 2023 results.
We hope you have a great day.
Hey, you may now disconnect the call.
Yes.