Computer Task Group, Incorporated
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the CTG First Quarter 2021 Investor Conference Call. At this time, all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions. As a reminder, today's call is being recorded. I'll turn the call now over to Mr. John Laubacker, Chief Financial Officer. Please go ahead, sir.

[John Laubacker:]

Thank you, John. Good morning, everyone on the call today. Joining me on today's call is Filip Gyde, CTG's President and Chief Executive Officer. Before we begin, I want to remind listeners that statements made during the course of this conference call state the company's or management's intentions, hopes, beliefs, expectations and predictions for the future are forward-looking statements.

[Filip Gyde:]

Thank you, John. Good morning and welcome to all of you joining us on this morning's conference call. We have a very good first quarter, highlighted by the achievements of another period of significant year-over-year growth in revenue and earnings per share as we continue to build upon the strong financial performance we delivered in 2020. Consolidated revenue increased 12% year-over-year, led by exceptional growth of our Solutions business and continued new business momentum in Europe. Revenue from Solutions grew 25% year-over-year, and represented 44% of total revenue, which contributed to higher gross profit and margins in the quarter. Overall non-GAAP earnings in the first quarter increased 30% year-over-year. Although the business environment has remained somewhat mixed with prospective clients taking longer to make contract related decisions, our sales organization continued to drive a healthy pipeline of business development activity at new and the existing clients. We continue to see and capitalize on increased demand for CTG's growing portfolio of Digital Solutions, as companies maintain their previous shift to work more employees working remotely. Specifically, the current environment has accelerated clients' need for new technology, as well as the speed in which these Solutions are implemented on the list. We had a number of notable wins in the courtroom, including securing multimillion dollar contracts over multiple years, with two different healthcare clients in the US to provide legacy application support and patient portal solutions. Additionally, we experienced continued business momentum in Europe, which contributed to our strong consolidated revenue growth and profit margins in the first quarter.

[John Laubacker:]

Thank you, Filip. And again, good morning, everyone. Thank you for joining us on today's call. As reported in our press release earlier today, consolidated revenue in the first quarter was $97.1 million, compared with $101.3 million in the fourth quarter and $86.9 million in the first quarter of 2020. The sequential decrease in first quarter revenue primarily reflects two fewer billable days, as well as the expected completion of a large multi-quarter contract with the health solutions client in the fourth quarter of 2020. The revenue increase of 11.7% year-over-year was driven by a combination of a larger mix of revenue from Solutions and continued business momentum in Europe. Currency translation had a positive impact of $4 million revenue in the first quarter of 2021, compared with a positive impact a $3.1 million in the fourth quarter, and a negative impact of $1.1 million in the first quarter of 2020. Total billable days in the first quarter were 65 days compared with 67 days in the fourth quarter and 62 days in the year ago first quarter. In conjunction with our focus on delivering digital IT solutions, during the first quarter, the company made minor modifications to its definition of Solutions business. All references made to Solutions revenue and Solutions gross profit on this conference call and in today's press release have been recast using the new definition for consistent comparison across all periods. Solutions revenue in the first quarter was $43.1 million, or 44.3% of total revenue. This compared to $49 million or 48.4% of total revenue in the previous quarter. Year-over-year, Solutions revenue increased $8.7 million or 25%, compared with $34.4 million or 39.5% of total revenue in the first quarter of 2020. Revenue from IBM in the first quarter was $19.6 million or 20.2% of total revenue, compared with $20.1 million or 19.9% of total revenue in the fourth quarter, and $19.9 million or 22.9% of total revenue in last year's first quarter. No other client represented more than 10% of revenue during the first quarter of 2021 or in recent comparable periods.

[Operator:]

Certainly. And we'll go to the line of Josh Vogel with Sidoti. Please go ahead.

[Josh Vogel:]

Thank you. Good morning, Filip and John. Thanks for taking my questions. Hope you're both doing well.

[Filip Gyde:]

Good morning, Josh.

[John Laubacker:]

Good morning, Josh.

[Josh Vogel:]

I have a couple of questions for you here. And going back a little bit to earlier in the year, you know, you know you talked about winning some COVID related helpdesk and backseat support projects. And I was wondering, you know, as COVID lingers and new variants pop up, is there potential for those long-term engagements, to become long-term engagements? And secondly, are there any other COVID-related opportunities that you're seeing in the marketplace, whether from healthcare providers or government agencies?

[Filip Gyde:]

Sure, Josh. Now looking at those projects and basically our aim whenever we win new clients and a new project is that, this is the first project of a long series of project. So any helpdesk or for that matter, any other development or integration project for us is the beginning of very strong and focused account management to find other areas within that client, where we can help them. That's just the way we operate and that's also how we grow. And now specifically on these helpdesks, well that's part of the fact that, though with vaccination, definitely in the States, we see things picking up again and COVID getting under control, there is no saying what else is still going to happen with those new variants. At this moment, it's more of Europe that gets the negative influence of those new variants. But obviously, where there's new evolutions, new elements, there's additional questions from patients, from public which increases the workloads on those service desks. And so that - that was the first part of your question. Could you repeat the second?

[Josh Vogel:]

Yes. Basically, you pretty much answered. I was just curious other COVID-related opportunities that you're seeing in the marketplace?

[Filip Gyde:]

Well, we're still seeing a lot of the evolution from everybody moving to work-from-home, because of COVID. That's indirectly and we're seeing now that companies are trying to determine what were - what they're going to do after COVID. And that's a new thing. So let's say three, four months ago, our clients were not thinking about that yet. Now you see them determining how they're going to come back, fully to the office, part time or some already have decided that they stay - work-from-home for a long period. And so that's an indirect consequence of COVID.

[Josh Vogel:]

Yes, understood. Shifting gears a little bit, obviously, really encouraging news about the new healthcare contracts. And I was just thinking about when you're selling breakthrough tech services like Cloud, versus legacy application support. Are the sales cycles any different? Can you just give us some commentary around that?

[Filip Gyde:]

The sales cycles are not necessarily different from classic IT efforts. At least, we're not seeing that. But we're still seeing that there's a slowdown compared of - compared by pre-COVID sale cycles. Where, yeah, when clients come to the contract decision moments, that there are still some hesitation, because they also don't have enough visibility on the near-term future.

[Josh Vogel:]

I got you. Okay. Obviously, very strong results, nice to see the momentum in Europe. You highlighted the utilization of the bench resources. I was curious how much additional capacity you have overseas to handle new and expanded projects that's where you have to meaningfully add account?

[Filip Gyde:]

Well, our European operations have the habits, no, they have the best practice of recruiting ahead of time, and to estimate the time necessary to recruit the notice periods that are following. So in any circumstance, they are keeping pipeline of candidates. They are hiring people for the projects that we expect to close within three months to six months. We obviously are prudent in hiring those people ahead of time. But the fact that we have very limited bench really means that they're doing a fantastic job. And we are not having to postpone client engagements, because we don't have enough people. I think also, if you look at our great place to work certifications everywhere, we're kind of an organization that people are attracted to and are following too. So our inflow and our potential candidates' pool in Europe is significant.

[Josh Vogel:]

Great. And maybe this one's more to John. You mentioned, if I heard it right, headcount in Q1 was 3,700, down 200 sequentially. Is that just seasonality or was there anything else there?

[John Laubacker:]

Hey, Josh -

[Filip Gyde:]

Hey, John -

[John Laubacker:]

Yeah, I can - I'll take that one, Filip.

[Filip Gyde:]

Sure.

[John Laubacker:]

It was mostly timing, if anything else, really as Filip that said, our utilization is high and robust and the European teams have done a fantastic job with minimizing their bench resources. We were coming off of that very significant healthcare project that we had completed in the fourth quarter. And so we still had some of those resources on board that bled very slightly into the New Year. So once that project was fully ended, those people came out of the headcount list. That was really the big difference between year-end and end of the first quarter.

[Josh Vogel:]

That makes sense. And you mentioned, Q2 revenue comparable on a billing date basis. Do you have the billing - the billing day number for Q2?

[John Laubacker:]

Sure.

[Josh Vogel:]

Just want to make sure I have the right one.

[John Laubacker:]

Yeah. 63 days in Q2.

[Josh Vogel:]

Okay. And I was just thinking about that. I understand you're not giving guidance. But you know, with the ongoing investment sorts of Digital Transformation, can you give any sort of directional commentary around how we should think about SG&A in Q2 and the balance of the years - and the balance of the year? And then but also any other areas that you plan to invest in that aren't necessarily related to Digital Transformation?

[Filip Gyde:]

John, you care to continue?

[John Laubacker:]

Sure, no problem. I think our run rate on this, Josh is, we look at more of it as an investment opportunity for the SG&A. And that's really what we did in Q1. We took the opportunity, because of really good sort of robust numbers. And again, for the reasons we've mentioned on this call as far as utilization and maximizing or minimizing the bench rather. The - we saw that in the - we saw the gross profit margin, I'm sure was up year-over-year as well, pretty robustly. 21.4% from 19.6%, we took that opportunity to make investments back into the business to grow for later this year and next year and so on. So I don't necessarily anticipate the run rate for SG&A to dramatically increase from here, because I think we've made some of those investments here in Q1. What I do - I don't expect it to necessarily go down either until revenue starts to grow a little bit from those investments that we've made and they start to produce new engagements. So from that perspective, I think the run rate that we've established in Q1 will be pretty consistent throughout the year. As far as making investments, other than in Solutions, it's Solutions and sales, so it's business development. We've made investments as we saw we did - had some of those back for the specific rebranding exercise, but in marketing, making sure that our recruiting teams have the right talent to recruit Solutions and Solutions adjacent type skills going forward. So, are we making significant investments outside of business development or Solutions or activities that drive our Solutions business or Digital Solutions business? The answer is no.

[Josh Vogel:]

I got you. Well, thanks for answering my questions. I'll hop back in the queue.

[John Laubacker:]

Thanks, Josh.

[Filip Gyde:]

Thank you.

[Operator:]

And we have a question from Kevin Liu with K. Liu & Company. Please go ahead.

[Kevin Liu:]

Hey, good morning, everyone.

[John Laubacker:]

Hey, Kevin.

[Kevin Liu:]

First question here -

[Filip Gyde:]

Good morning.

[Kevin Liu:]

Good morning. The recasts of the revenues from staffing the Solutions. Can you just talk about the nature of what those services were? And it looks like it also kind of boosted the Solutions' gross margin at least on a historical perspective. So again, just kind of curious what those services were? And then perhaps how much that may have contributed to Q1 Solutions just for comparability purposes?

[Filip Gyde:]

Sure, Kevin. I'll maybe start with the general picture, and then pass it on to John for more color. As we are expanding our portfolio of services into Digital Solutions, what we did is, we reviewed all of our Solutions' definitions to ensure we have clear consistency going forward across the portfolio. We then evaluated what we provide to the clients against our business technology operation Solutions to ensure everything is correctly identified and categorized. And we also looked at high margin staffing services we provide to determine if a portion of those were instead Solutions rather than staffing, because primarily given the margin when you have staffing services at really high margin, that's an indicator that it's more perceived and bought by the client as a solution than as a staffing. So basically that was the process that we went through, to make sure we have a strong rules and processes as going forward with the Digital Solutions portfolio. John, you want to add some color?

[John Laubacker:]

Sure, Filip. So, Kevin, the second part of your question was around maybe the change in numbers from one period to the next. As we indicated, we recast all numbers presented in the release and in today's call so going back to Q1 of last year under these refined definitions. And so when you look at the year-over-year increase of nearly 25%, million in Solutions revenue, those are using the same definitions both in Q1 of 2021. And again, applying those same definitions back to Q1 of 2020. So the change in definition - definitions didn't really cause an increase in or change in the numbers from one period to the next, because we're using consistent definitions. It really was just a fantastic job across the organization as far as selling the Solutions business in Q1 of '21 at a higher pace than we did in Q1 of '20.

[Kevin Liu:]

Yep, understood. And then just in terms of the momentum in Europe that you're seeing, you know, what services are driving that currently? And given that Europe seems to be a little bit slower than maybe the Americas in terms of vaccinations and lifting of restrictions and such. I'm curious that as things start to be eased over there, do you expect further acceleration in terms of sales cycles and the growth rate there?

[Filip Gyde:]

Sure. Well, Kevin, I think if you look at our Digital Transformation portfolio, we see good traction and good pipeline in all of the three main areas. And if you look to the digital accelerators, the general areas we're looking at in Digital Transformation, we see a lot happening in Agile DevSecOps, Intelligent Automation, Clouds, Automated Testing, it's not a surprise, because it's - testing has been one of our flagship offerings in Europe and it's starting to evolve like that in the states too that Automated Testing is going forward in that direction. So it's kind of a well spread over the portfolio. I think that's been - that's a tribute to our Global Solutions team that really have put that portfolio together very well. So, selling something in one area triggers an opportunity in another area. On your question of acceleration, yes. Yes, we see finally, I might say that the vaccination is picking up a little bit of speed. But still we're by no way in the area where already all the states that's already in, I kind of heard that almost anybody who wants a vaccine can get from and doesn't even have to make an appointment. Well in Europe, we're not there yet just to say, Belgium, well they're starting to vaccinate my age group. And I'm over 60. So, we're really not there yet. And there was a concern about that the new Indian variant that could come into our countries. So I see the impact of that on the business is, yes, we see traction, yes, we see a good pipeline. But for the moment, we don't see the sales cycles significantly accelerate. I think we need a little more confirmation about that. And well frankly, if you look at the countries, France is in lockdown, Germany is in lockdown, Belgium is now opening the outdoors of restaurants for the first time in what in four, five months. So it's very, I would call it, fragile at this moment.

[Kevin Liu:]

Got it, that's helpful context. And then just, you know, staffing isn't a core focus for you guys anymore. But at the same time, it did return to growth this quarter. I was curious, you know, whether that's kind of a sign of things starting to reopen again, particularly in America as and then as you move into the next few quarters here, kind of what your outlook is for the staffing business?

[Filip Gyde:]

Well, for staffing our strategy is very clear, it's on the one hand, looking at the lower margin staffing business and critically evaluate and continue to disengage those lower margin staffing agreements we still have. But what's helping the growth and what's new in our staffing efforts is that we're aligning our new staffing engagements with the skill sets that we need for our Digital Transformation Solutions, which means that our recruiting engine is fully focused on those skill sets. And we can use them to staff our own Solutions and also staff clients' needs in those areas. So it's the same Digital Transformation trends and momentum that is fueling our Solutions business. And this also helping our staffing business to grow in the areas where we wanted to grow. But there's still a combined movement areas that are growing in staffing and areas that we're disengaging from.

[Kevin Liu:]

Okay. And then just a couple of quick ones on the 2023 vision here. I guess the first one is just obviously acquisitions that are likely to play a role in that. If you aren't able to find something in that chain upgrade. Can you just talk a little bit about how confident are you still achieving the goals that you've outlined there? And then just separately, can you give us kind of a baseline for what percentage of your Solutions businesses currently going through the delivery centers? And any sort of numbers you can put around, you know what it means in terms of margin improvement if 20% of that business is going through that?

[Filip Gyde:]

Sure. Now I was Hello? Hello? Hello?

[John Laubacker:]

I think you got .

[Filip Gyde:]

Hello? Hello?

[John Laubacker:]

Yeah, you're back.

[Filip Gyde:]

Okay. Sorry about that. Sorry, Kevin, but it's getting lost, I also lost your question. Could you briefly repeat?

[Kevin Liu:]

Yeah, no problem. Just two questions on the 2023 vision. First one is just, if you aren't able to complete an acquisition kind of in the next couple of years here, you know how much does that impact your ability to reach your targets that you talk about? And then the second part is just asking for a baseline for how much your current Solutions business is going through your delivery centers? And what you know the uplift to 20% would mean from the gross margin perspective?

[Filip Gyde:]

Okay. About the first part of your question. Yes, when we look at our vision, our 2023 vision, we're looking at the combination of organic and acquisition growth. But if you look back to the acquisitions we have done so far, the three acquisitions, you definitely can see that we're not acquiring for adding a volume of revenue, we're adding capabilities in Solutions that we're not adding yet or that we want to develop faster. We're looking at adding a client portfolio or a talent pool that we didn't have. So, it's more like an accelerator than it is adding an amount of revenue. So I think though, we are looking and continuing to look at acquisitions going forward, as our confidence that we will get to the targets that we have put forward with a very reasonable look at the acquisition potential. Now, John, if you want to add something to that.

[John Laubacker:]

No, I thought that that was very good. It's certainly, Kevin as part of the plan and part of ultimately coming up with the numbers that in the 2023 vision, but it's more of a acquire Solutions and something that's additive to the Solutions portfolio to drive revenue in that manner going forward.

[Kevin Liu:]

Great. And just on the gross margin aspect of that, I was curious what those - the delivery centers and shifting more business into their, you know, what does that differ from the margin perspective?

[Filip Gyde:]

Well, if you look to, for instance, moving work offshore to India, that easily could lower the delivery costs, with two-thirds or even more, obviously, delivery is one part of the equation if you move work offshore, you always have to be careful for what they call, the double-edged sword, that the clients who are sophisticated also know that the delivery costs are lower, and you won't be able to shift work offshore, unless you also have an incentive profit for the clients. So revenue can also be effective. But when you look at selling new business and having a better mix, like the end goal of 20%, being from our Global Delivery Network, then you can definitely lower delivery costs significantly even though at some places you sometimes need to add resources, because the communication and the interaction isn't always easy. And, John, you want to add some color?

[John Laubacker:]

That was great. Kevin, I think part of your question too originally was talking about maybe the numbers or the headcount, we - that's not something we released as far as the headcount we currently have. But I can tell you that we have hundreds of people in the delivery center concept today and our plan by the end of '23 would be to more than double that. So it is a significant increase in the total people working out of delivery centers. And as Filip indicated, as you leverage those delivery centers, whether that be India, Bogota or other locations, you can then maximize the efficiency, the effectiveness, the price efficiency at which you deliver those services.

[Kevin Liu:]

Okay, great. Thank you for taking the questions and congrats on strong start to the year.

[John Laubacker:]

Thanks, Kevin.

[Filip Gyde:]

Thanks, Kevin.

[Operator:]

And with no further questions, I'll turn the call back to management for closing comments.

[Filip Gyde:]

Thank you, John. In closing, our accomplishments and financial results in the first quarter represents a solid start to the year. Fundamental to our success is the team's ongoing execution of our strategic plan as we continue to drive the growth of CTG's Solutions business. Looking forward, we will continue to expand our portfolio of Digital Solutions and enhance our global delivery capabilities, while supporting these offerings with industry-leading talent. Together with our recently launched rebranding, I believe we are poised to build on our recent momentum in the coming quarters and solidify CTG's new positioning as a catalyst for Digital Transformation. As we pursue and execute on our mission to help IT and business leaders accelerate their digital momentum and achieve their desired outcomes, CTG in turn will succeed in our strategic objectives of driving above market growth, improving profitability and increased value for shareholders. Thank you for participating on today's conference call. And for your ongoing support of CTG. John, you may now disconnect the call.