Q2 2023 Mastech Digital Inc Earnings Call
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Yeah.
Greetings and welcome to the Mastech Digital Inc. Q2, 2023 earnings call at this time, all participants are in a listen only mode.
And answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
Now my pleasure to introduce your host Jennifer Ford Lacey manager of legal Affairs for Mastech Digital Inc. Thank you Ms. Ford Lacey you may begin.
Thank you operator, and welcome to Mastech Digital's second quarter 2023 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 dotcom.
With me on the call today are Vivek Gupta.
That's like Digital's, Chief Executive Officer, Jack Cronin, our Chief Financial Officer, and Michael Fleishman, Our Chief Executive Officer of the company's data and analytics services business segment.
I would like to remind everyone that statements made during this call 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 2022 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at Www Dot S. D C 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 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 up.
Pain from our web site at Www Dot Mastech digital dotcom.
As a reminder, we will not provide.
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 second quarter 2023 results.
Thanks, Jen and good morning, everyone.
Second quarter 2023 was another challenging quarter for Mastech digital.
Revenues totaled $52 $2 million, representing a 16% year over year revenue decline.
Both the board business segments were impacted by customer concerns regarding slow economic growth high inflation and the possibility of a U S recession, which has lowered demand for our services in the near term.
Our data and analytics services segment contributed revenues of $8 $8 million in the second quarter of 2023 compared to $11.2 million into 2022 second quarter.
As customers reduce resources on existing projects in light of continued economic uncertainty.
Order bookings, however increased to $10 $1 billion in the second quarter of 2023.
I'm here to $8 $4 million in the first quarter of this year.
Additionally, our pipeline of opportunities continued to improve with the caveat that customers are taking a little longer to actually start new projects once awarded.
Second quarter 2023 revenues in our it staffing services segment.
Totaled $43 $4 million compared to $59 million in the second quarter of 2022.
Demand continued to be soft in the current quarter, particularly with respect to financial services client.
Gross margins in the second quarter of 2023 was 26, 1% compared to 27% in the second quarter of 2022.
In our data and analytics services segment gross margins improved by 200 basis points compared to the second quarter of 'twenty to gross margins.
This favorable margin variance was largely due to higher utilization rates in the 2023 quarter pause, we continued to drive better efficiency.
Delivery processes.
And our it staffing services segment gross margins were down 110 basis points compared to Q2 2022 due to a reduction.
Sure and direct hire revenues and higher than usual medical claims related to our self insured healthcare program.
Yeah.
In the second quarter of 2023, we recorded a pre tax settlement reserved.
$3 $1 million on an outstanding employment related claim.
No lawsuit has been filed to date and we are currently in negotiations to settle this matter.
GAAP net loss for the second quarter of 2023 with $2 $2 million or a loss of 19 cents per diluted share compared to a $2 4 million dollar net income or <unk> 20 per diluted share in the second quarter of 2022.
The settlement reserve noted above.
Captive reducing GAAP.
Earnings per share by <unk> 19 per share.
non-GAAP net income for Q2, 2023 was $1.3 million or 11 cents per diluted share.
<unk> to $3 $6 million or <unk> 30 per diluted share.
In the second quarter of 2022.
SG&A expense items not included in second quarter, non-GAAP financial measures net of tax benefits or one stock based compensation.
To the amortization of acquired intangible assets and three the 2023 settlement reserve.
Morning outstanding employment related claims.
A description of these items is included in our second quarter 2023 earnings release, which is available on our website.
Oh, so it should be noted that both GAAP net income and non-GAAP net income in the second quarter of 2023 included $600000 of professional service expense related to the outstanding employment claims.
Yeah.
Addressing our financial position on June 30 of 2023, we had $18 $6 million of cash balances on hand, we had no bank debt outstanding and borrowing availability of $23 $9 billion under our revolving credit facility.
Our day sales outstanding measurement was 56 days at quarter end, which is well below our target range of 60 to 65 days.
Or five days and we're five days better than our major mining at March 31 2023.
During the second quarter of 2023, we executed on our share repurchase program purchasing approximately 62000 shares of Mastech digital common stock at an average price of $9 15 per share.
I'll now turn the call over to Bert for his comments.
Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for Q2, 2023.
The same macroeconomic headwinds that we experienced during the first quarter of 2023 continue to impact our clients' spending dynamics in the second quarter, resulting in lower demand for our services.
Our it staffing services segment continued to see clients, taking a more conservative approach with respect to spending on new assignments due to concerns around a potential recession on the horizon.
Our financial services clients in particular.
Been more inclined to tighten the purse strings, given the recent regional bank failures and worries about a broader banking crisis.
In recent weeks. However, we did see a modest improvement in demand from some of our clients in the financial services space, but I wouldn't call. This a trend just yet.
Also during the quarter, we expanded our portfolio of staffing offerings with an entry into engineering staffing services or E. S. S. As we call it for short.
Yeah says is an adjacency to <unk> staffing and we'll be using the same recruitment engine that our customers depend upon amtrust.
Since its launch in late me E. S. S is gaining traction with both our existing as well as new customers and we are hoping to see in the quarters ahead. This new service offering and make up some of the recent declines in it staffing.
Our data and analytics services segment's performance was also impacted by clients reducing resources on existing projects.
Bond to economic uncertainty.
Michael will talk more about the state of affairs in the data and analytics services business in a few minutes.
While we are encouraged by improvements in recent inflation data and some signs that the U S Mail Dodge a recession, we have and will continue to take prudent actions to reduce our SG&A expenses in an effort to protect our operating profits.
I would like to reaffirm that hundred put some confidence our belief that our businesses remain fundamentally sound and that our financial clients are among the strongest in the industry and that we have a solid balance sheet and access to ample capital to fund our current business needs and to support the share repurchase program that would be an ounce.
Earlier this year.
Let me now turn the call over to Michael for his comments related to the data and analytics services segment, where do you go Michael.
Thanks, Vic and good morning, everyone as Vivek mentioned uncertain economic conditions are clearly impacting our clients' spending behavior.
During the first half of 2023, we have seen clients reducing resources on existing projects is there a way of mitigating concerns over economic conditions and this posture has negatively impacted our revenues. However.
Beyond the revenue numbers, we believe we are making good progress in our efforts to reposition our organization from a master data management company to a much broader data and analytics services firm that focuses on India and data modernization services.
Our progress in this transition can clearly be seen in our increased order bookings and pipeline building performance year to date.
In the second quarter of 2023 order bookings increased to $10 1 million.
Or $1 $7 million higher than the first quarter of this year 2023.
Our first quarter bookings.
We're also 1.6 million higher than the previous Q4 2022.
Furthermore, during the second quarter, the number of our RFP, some middle <unk> as well as our overall pipeline of opportunities.
Both increased.
My expectation is that bookings will continue to expand over the second half of 2023, which should set us up nicely in 2024.
Also in the second quarter of 2023, we made solid improvements in our gross margins our second quarter gross margins were 45, 6% of revenues.
For 200 basis points higher than the corresponding quarter of 2022. This improvement reflected a higher utilization rate in the 2023 quarter versus the second quarter of 2022.
For Mr. Qi, sorry from a strategic point of view, we aim to consistently have gross margins in the upper 40% gross margin range irrespective of our revenue levels simply put we need to quickly adjust our billable workforce to real time revenue streams.
<unk> to adjust is something that is a primary focus of our delivery team.
I'll now turn the call back over to Vic.
Thank you Michael Operator. This concludes our prepared remarks, we can take questions now.
Yeah.
At this time, we will be conducting a question and answer session. If you would like to add.
I ask a question. Please press star one on your telephone keypad.
The tone will indicate your line is in the question queue. You May press Star two if it was extra movie a question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Please while we poll for questions.
Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.
Good morning.
Nice to see that you hi, there may you made your earnings even though we had lower revenue.
Great margin well, that's very encouraging.
Oh. Thank you I have a few could I have a few questions.
First off.
Staffing you said you had a decline in financial services do you know what percent C. G. I was for the quarter.
Oh, yes mm Jack would you have the precise number I think it was close to 24% is that right like if it was 24%.
Okay. So it was it across the board not just them.
Yes actually up so I think we mentioned in the last.
Earnings call, approximately 50% or just less than 50% of our business have been from a financial services. When we started the year.
And we've seen that virtually across the board.
Customers direct customers that we work with is when those customers through partners like CGI.
Okay, and what was the.
The billable consultant number for the quarter.
Jack do you have that number in front of you.
Yeah I do.
Yeah and.
And of the AR from.
Indicate it.
At the ended the quarter or our billable consultant base was 1041.
Oh, Okay. So that's up.
Oh good.
Could you go a little bit more into an example of this E. S. S offering can you give us maybe.
An example of a customer using it and what they do.
Sure shortly concept. So this maybe I'll add a little bit of color on the E S as Oh.
Beyond what you just asked as well, which is we we see E. S. S. As an adjacency as I mentioned to the I T. Stopping because we are able to use the same recruitment engine. We are able to use the same sales engine and we find on the customer side. The buying centers are also.
Fairly similar orphan disease, which as you know the procurement.
The processes that they have in place.
Now.
Bill rates gross margins all seem to be in line with the I T. Stuffing. So clearly there is room to cross sell now coming to your question what kind of customers that we're talking about actually be found there as well.
Actually a 19 or 20 of our customers.
Already using engineering services and engineering services, the kind of people are the kind of consultant, they're looking for could be mechanical engineers electrical engineers test engineers facilities engineers industrial engineers, and so on and so forth.
And it's.
It is easy for us in some ways to cross sell.
Oh, yes.
Yes.
To our customers who are already.
Our customers for a very long time.
So I hope that gives you a sense of what you're looking for you said.
Yeah. So it's basically kind of like a job shop, where you sign up for a six month project or something as an engineer.
Is that right you got it it's not very different from idea staffing, which is the customers have requirements they reach out to us either directly or through our Vms, our portals and I, we look at those requirements and find the appropriate the consultants and I'll go.
Go through the same process of putting them in front of our customers and you don't get them to reorder and Oh.
Customers are going to be signing up for whatever duration. They are looking for but it does average six to nine months. So what we have seen.
Are there requirements tend to be in that range.
Alright, great sounds good so I just have one last question about this employments.
Issue. So on the balance sheet, you have 6 million for a liability and then 2.2 million for insurance recovery you can explain the mechanics of that.
Yeah.
Jack will you go through the numbers.
Yeah sure and again these are our estimates you know where we're in the process of negotiating a settlement right. Yeah. So I mean or our estimate is that we're going to have a gross.
Claim before.
Insurance and other offsets of of.
Of $6 million, our estimated on an insurance claim would be one or $2.2 million and then we have some other recoveries debt.
I don't want to say right now because we're still in negotiations, but would bring down the net claim to $3 $1 million.
Okay, and why isn't it isn't does that the six billon include the lawyers and all that sort of stuff.
It does not.
Okay, Alright, and that you said that was 600000 in the quarter.
Sure.
Okay.
Yeah.
Right alright, great, Okay, well so it.
So should we expect revenues for both businesses to be sequentially up in Q3 and for expenses to be down a little.
That's the general thought.
Oh, so Lisa I would not want to.
Make a projection there, but I mean, clearly we are not out of the vehicles economic uncertainties at this point in time.
So we need to go through this quarter and see how it pans out.
Okay, great. Thank you so much that's all my questions.
Thank you.
Our next question comes from the line of Tim call with Capital Management Corporation. Please proceed with your question.
Good morning.
With regard.
Hi, with a clean balance sheet.
And no debt.
And your.
Your share repurchase pace.
I'm, leaving you with $18 million on the balance sheet.
Is there a way to make it so that earns interest if you put it in a.
You know three or six month U S Treasury bills.
Might be making over 5% or $1 million a year on that 18 million cash.
Or are you able to invest.
Invest any of that earn interest on any of that cash balance on your balance sheet.
Yeah.
Jack.
Yeah, we are we are and.
The interest.
Income that we earned.
In the second quarter and of course, we didn't have all 18 million.
You know on day, one or two quarter.
We we probably we had interest income of <unk>.
I would I would back about $120000 in Q2.
But you know what we have a and we have flexibility we have an arrangement with our.
Thanks T N C, where you know as soon as they sweep the funds were earning.
Interest income and you know the day that we need to fund to fund working capital and just day to day your accounts payable and payroll.
It comes out.
We have sufficient with the the monies that we have.
Some of our monies or.
In foreign subsidiaries.
We invest there as well, but you know the could lock something up for.
You know a substantial period of time, we we haven't really looked at that yet, but we will as our.
It was all about cash balances grow.
We will take that approach.
Two to invest in multiple months rather than on a day to day basis.
Well, knowing you're a successful history and.
Having Michael the DNA and expanding into.
E S S.
It's a very bright outlook hopefully.
That cash can be put to use with accretive acquisitions, but also the.
Share buybacks.
So as.
Hum.
You you move out of this slower.
Slower period.
Having those share buybacks.
Continue or accelerate.
We will have very positive long term results. So congratulations on repurchasing some already.
Yeah.
Thanks, Tim.
Yeah.
And our next question comes from the line of Marc Riddick with Sidoti and company. Please proceed with your question.
Hey, good morning, everyone.
Hi, Mark.
So I wanted to just go over a couple of things one of the things that you mentioned to and you're a press release and prepared remarks, where some of the.
This reduction EF.
First just wanted to dig a little bit into a bit more in sort of how we should think about those.
Those benefits are with both within the quarter and going forward.
I didn't quite catch Oh, you're talking about the reduction in the SG&A expenses.
Sorry, I think it was within the.
The press release and some of it just some of the cost control efforts that took place during the quarter and how that plays out going forward.
Yeah, So so mark I'm good.
The good thing, though is that we've been through this just a couple of years ago, when 'twenty 'twenty when COVID-19 hit us.
And we took all the prudent cost control steps at that time, So we were able to sort of revisit the same playbook.
And what we have done is basically pushed out.
Or deferred or canceled all discretionary.
Expenditure.
So things like you know if you are having.
The conference is being done.
Tunnel conferences, we are doing it more virtually rather than in person. We're looking at every single day.
The kind of relationships that we have with our windows and see how we can improve upon it we are looking at a low performing.
Stuff and see if we can reduce our head count.
And not have them looking at the other expenses.
Reach of our.
<unk>, which can be brought down.
Deferred.
Compensation increases by a couple of quarters.
So it's basically looking at every element of the S unit cost and seeing if there is a way we could either reduced or deferred.
And that has been something we've done now for a couple of quarters and we will continue to look at things as we go forward until things start opening up once again.
So that's the plan.
Yeah, Okay, and then Mark I'm sorry go ahead.
No.
This is Jack the only other thing that I need to point out is is some of our expenses are you.
You know.
Still correcting if you will I mean, they come down on their own such as.
Commissions and bonuses, where you know if we're in a recessionary type environment.
The environment or a low growth environment.
We have lower commissions, we have lower bonuses, we have lower background checks. So we're going to get the benefit of and we have gotten the benefit of those types of expenses.
In addition to what the VIX hit.
Okay. That's helpful. Thank you and then where do we finished can you give us an update as far as what where bill rates were during the quarter and maybe some of them you know any thoughts around what you're seeing there.
So Jackie will have the yeah our.
The bill rates are.
Our printing down a bit.
But it's it's not.
I like being or gross margin content.
For most of our projects is trending down it's more of the <unk>.
Types of resources that we're using on our projects I mean, you know if we have resources that are $80 and our resources and we make 'twenty.
We're saying 25%.
No I think we're using the resources that are a little lower but still have the same or close to the same margin contact but we're doing a few bucks.
With respect to the average bill rate.
Okay, and then I think you said that the I just want to make sure I heard you correctly the head count was 1041.
Yeah.
I think yes.
I think Lisa said, that's good it's higher but it's not hired slower.
Okay I was just double check on that and then the.
Where's it going with says Oh, yes, so there was a commentary in prepared remarks around.
Utilization.
In our DNA and I was wondering if it is Michael sort of talk about where those those benefits are occurred in sort of you know sort of how they how they materialize there.
Sure My Gleevec, Okay, if I take that yes, no. Thank you.
So the utilization was predominantly increase there were a couple of different avenues, one tiger controls and processes over our existing project delivery. So that we have greater visibility into our ramp times. So that when projects were starting to ramp down and resources. We've got right now controls in place to have a four month notification.
On that than we have for months to ensure that those resources are either.
Renewed within the existing clients or placed in net new opportunities within the existing client were placed in net new opportunities within other clients such that when they ramp down they immediately ramp up into another project either again within the same customer or another customer. This is the primary.
Contributor to driving greater utilization in addition to driving net new bookings, which of course require resources to be to be leveraged and utilized we never want to have a zero percent bench, because we always want people training and cross certifying but.
But our goal internally is an 80% utilization rate and we've been really really good and consistent hitting that level of utilization internally, which then drives.
Greater levels of gross margin, which you've seen in our numbers consistently increasing over the past two quarters.
Yeah.
Okay now that's very helpful. Thank you and then I guess.
Last two questions for me one I know.
You've talked about so the struggles within financial services I, just wanted to talk a little bit about maybe some of the other customer vertical industries, whether you know what you're seeing whether it's in retail or our health care.
The lights.
And then the second.
Question is around the new interesting engineering and staffing services kind of maybe the type of revenue contribution that maybe we're seeing initially and what you believe that can grow too. Thanks.
Sure.
Sure.
We've been seeing but hum cost control from the customer side across the board in all industries.
And before the the regional bank failures happened it was evenly balanced maybe to a lesser extent on the financial services side, and then suddenly that started picking up steam.
So I wouldn't want to single out any.
Specific industry, but at this point in time, we are seeing it across the board.
So that's the first part of my first question and the second one on the engineering services side.
Candidly, we just started this we'd be launched on may 31st. So we just had a few weeks there.
And right now at this point in time, we've seen a lot of interest a lot of traction we are seeing some breaks coming through and we've only had a handful of placements. So we really don't have enough data at this point in time to tell you how that is going to is impacting the overall.
The numbers in terms of bill rates for gross margins, but our research has shown that we you know the the bill rates and gross margins should be comparable to what we are able to get on the staffing side.
Okay. That's helpful. Thank you very much.
Thank you Mark.
Yes.
And just as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.
Yeah.
And we have reached the end of the question and answer session I'll now turn the call back over to Vivek Gupta for closing remarks.
Well, 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 third quarter 2023 results with you in early November .
Yeah.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Hum.
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Okay.