Computer Task Group, Incorporated
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to CTG Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s conference call is being recorded for replay purposes. I would now like to turn the conference call over to CTG’s Executive Vice President and Chief Financial Officer, John Laubacker. John, please go ahead.

[John Laubacker:]

Thank you, Kierra, and good morning, everyone. Joining me on today’s call is Filip Gydé, 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 Gydé:]

Thank you, John. Good morning to all of you joining us on the phone and participating via webcast. It’s a pleasure to be speaking with you today and report on our continued success. The team’s consistent commitment to disciplined execution on our strategic plan resulted in a strong finish to year of exceptional financial performance. Fourth quarter revenue was up more than 14% sequentially driven by growth from our solutions business, including increase demand for our portfolio of digital solutions offerings. Revenue from solutions grew 22% sequentially, expanding to 42% of total revenue. Contributing to our strong sequential growth was a larger than anticipated increase in health solutions business. During the quarter, we benefited from further expansion and the completion of an extensive engagement for a previously announced go-live implementation and training services project with a large existing health care system in the U.S. Another notable area of strength was our IT infrastructure and implementation business in Luxembourg. The yearend spending by existing clients contributed to meaningfully higher sales in the fourth quarter. Additionally, we maintain robust utilization of our billable resources across the organization, including lower levels of unallocated bench resources within our European operations. Combined with our gradual disengagement from lower margin staffing business, we closed out 2020 with our highest operating margin in five years. For the full year, we significantly improved overall profitability with both operating and net income, as well as adjusted EBITDA increasing year-over-year to represent new multi-year highs. When considering the challenging environment and a lower consolidated revenue base, our strong operating and bottom line results for the year serve as important validation that our existing solution strategy is working and yielding the anticipated outcomes.

[John Laubacker:]

Thank you, Filip. And again, good morning, everyone. Thank you for joining us today. As reported in our press release earlier this morning, consolidated revenue in the fourth quarter was $101.3 million compared with $88.6 million in the third quarter and $99.3 million in the fourth quarter of 2019. The sequential increase in total revenue was driven by multiple factors, led primarily by the continued expansion of our solutions business that included a sizable contribution for the completion of a multi-quarter project with the health solutions client in the fourth quarter. Additionally, currency translation had a positive impact of $3.1 million in revenue in the fourth quarter, compared with a positive impact of $1.8 million in the third quarter and a negative impact of $1.3 million in the 2019 fourth quarter. Total billable days in the fourth quarter were 67 compared with 63 days in the third quarter and 65 days in a year ago fourth quarter. Solutions revenue in the fourth quarter increased $7.7 million or approximately 22% sequentially to $42.8 million and represented 42.2% of total revenues. This compared with $35.1 million or 39.6% of total revenue in the previous quarter. Solutions revenue also increased $4.9 million or 12.8% year-over-year compared with $37.9 million or 38.2% of total revenue in the fourth quarter of 2019.

[Operator:]

As we move to Q&A. We do have a question in the queue, let’s go to the first caller. Your line is unmuted. Please go ahead.

[Kevin Liu:]

Hi, good morning. This is Kevin Liu with Kevin Liu & Company. How are you guys doing?

[Filip Gydé:]

Hi, Kevin.

[Kevin Liu:]

Great. First question I wanted to touch on, Filip, you mentioned a couple of awards that could be the first in a series of health care providers. It sounded like that was related to some COVID items. Could you just talk a little bit more about what those awards were, how meaningful they are and how you see them kind of expanding over time.

[Filip Gydé:]

Sure, Kevin. Talking about, like, it will say COVID-19 related helpdesk solutions that need to be deployed fairly quickly. You can think for instance of vaccination support for health systems and all of that is on the speed with which they’re coming and the size will depend or is depending on the availability and the logistics of the vaccine. So it’s a bit of a target that’s in moment there. We have a first contracts have been awarded significant. But it’s a little – at the same time, it’s early and it’s already in the ongoing to understand how fast and how big this is going to become. And I’d hoping to states logistics with the vaccines are not as difficult as they are in Europe. That’s for sure.

[Kevin Liu:]

Understood. That’s helpful. And then maybe more generally, in the past few quarters, the COVID pandemic was going on. You guys talked about cell cycle flowing with your healthcare provider customers, given that they’re still dealing with some issues here, but at the same time, maybe there’s light at the end of the tunnel. I’m curious if those discussions around other aspects of your healthcare business are moving forward. And what you expect in terms of being able to kind of grow bookings over the course of 2021.

[Filip Gydé:]

That’s a very difficult and tough question, Kevin. You’re almost asking me to make a statement on how COVID is going to evolve in the next couple of months. We all expect we’re going to get out of this and vaccination is going to prove part of the – big part of the solution. We see that in countries small, for instance, the States also Israel, UK starting coming out. We also see that the log of work has been deflected to what is actually extremely urgent. In the beginning, it was the collaboration software, the support of work from home now with those COVID-related helpdesk solutions. We believe that when we’re at the other end of the funnel or when that that image is very clear, business is going to take up. But I don’t know when that’s going to be, because it’s also very dependent on the global situation and the different speeding progress in vaccination between the continents is big. So timing is still a question Mark, and that’s also why we didn’t give any guidance for the remainder of 2021 at this moment.

[Kevin Liu:]

Yes. Understood. That being said, maybe this question is for John, but just in terms of the guidance and outlook statements, I know it’s more qualitative at this point. But you talked about expecting solid revenue growth as of this year. Just curious how much visibility you guys having that with striving on that level of confidence. And then beyond that, just in terms of the mention of disengagement from lower margin staffing business, just wanted to check and see if there were other sizeable engagements that you have or potentially are expecting to walk away from a little bit quicker this year.

[John Laubacker:]

Sure, Kevin. So a couple of points there. Relative to the revenue growth and solid revenue growth comment that we put in the release. We’re excited and I’m sure you can tell from the release, from the call today about the execution that we’ve had over the past year, really over the past couple of years on driving these solution strategy and now further with a digital solution strategy. We do see opportunities in front of us as fully just said, it’s somewhat hard to predict at times because the throughput from opportunity to closing a deal has become longer. But we see enough opportunities in front of us, especially in the solutions areas, especially that area where we were primarily focused, that we do believe that we can continue to generate, or we can this year regenerate rather some revenue grow. So solid is not a double digit number, but it is a growth number. Relative to the staffing business and stepping away from the lowest margin staffing business. I think we’re going to continue to do that. All of our efforts, time and resources and energy are going into driving the solutions business in a variety of different ways, again, skills where it be methodologies, whether it be processes. We understand that’s where we’re focused. I think our disciplined execution this year has been great. And part of that story is continuing to disengage as appropriate from the staffing business. So I don’t envision us doing that in a very, very significant way, but we are going into continue to critically evaluate the staffing opportunities as they come up for renewal.

[Kevin Liu:]

Great. That’s helpful. Well, congrats on a strong year here, especially given the circumstances and a good luck in 2021.

[John Laubacker:]

Thanks Kevin.

[Filip Gydé:]

Thanks Kevin.

[Operator:]

Moving to the next caller in the queue. Your line is unmuted. Please go ahead.

[Josh Vogel:]

Hey, good morning, Filip and John, Josh Vogel, Sidoti. Hope you guys are do well. Good morning, John. So in the absence of being guidance, I just kind of want to get a little bit of a sense of rational commentary around Q1 with the completion of the multi-quarter project and just general seasonality. Can you just kind of talk to what kind of step down in revenue we could expect for Q1 this one?

[Filip Gydé:]

John, would you like to take this one.

[John Laubacker:]

Yes, sure. I think we’ll definitely see a step down in revenue in Q1, Josh, but it won’t be a significant or unusual. We had strong, as we indicated on the call, we had strong business this multi quarter go live that we had done. We had very good sales in Luxembourg relative to infrastructure IT and there. However and there are also a few less billable days in the first quarter. So having said that, I don’t think it will be materially different than sort of our run rate on billable days. So from that perspective, I think you get comfortable that we had some really good events and really good projects that drove the fourth quarter, which is fantastic. But it’s not a significant from sort of a static run rate on revenue per day to be materially different in Q1.

[Josh Vogel:]

Understood. Can you remind me the total number of billable days that you have for Q1? I want to make sure my matches up.

[John Laubacker:]

Yes, I’m – I’ll – I don’t have that right in front of me, but I’ll get back to you on that.

[Josh Vogel:]

Okay, sounds good. Shifting gears a little bit understanding that as solutions grows, so should the margin profile of the overall business. I know that utilization benefited from a little vacation and sick time. Should we expect that utilization to maybe swing back a little in the other direction post-pandemic or as things normalize? How should we think about that?

[Filip Gydé:]

John?

[John Laubacker:]

Sure. Our solutions margins have pretty consistently been significantly higher than our staffing margins and how we’ve looked at it, Josh internally is it depends upon the service being provided on both sides of that staffing service and the solutions, but generally the margins at the end of the day are 2 to 3 times higher. So it’s not a reasonable to think that a staffing engagement would yield the margins that are 2.5 times as high. So from that perspective we would – as we continue to drive the solution side of the business and again disengaged from the lowest margin staffing business we really think that there’s a progression, a steady progression higher on a pretty consistent basis on both two or three things. One is the overall margin for the organization. Two, as we stress and sell and deliver digital solutions we think that that’s got even higher opportunity and higher margin within the solutions portfolio. So we think our solutions margin again should gradually increase. Now we’ve had this – we said in the past, and we’ve said to, in general that it isn’t always going to be a linear increase. Some quarters won’t be up or some quarters will be down, but we think long-term very steady climb in the solutions from mid-to-high 20s to a higher number and overall beginning to look more towards the mid-20s overall. Now I’m not sure that that we’re going to get there in 2021, but significant improvement on both ends.

[Josh Vogel:]

I appreciate the insights there. The agreement with our client and Northeast a driver being increased there. Let’s jump in financials versus sequentially. Just curious, was that related to the IT infrastructure implementation business in Luxembourg, or was there a new win or an expansion there, or a bit of both?

[Filip Gydé:]

I didn’t hear the first part of the question, John, I’m not sure, if you?

[John Laubacker:]

Yes, I’m sorry, Josh. You broke up a little bit at the beginning of the question, so I wasn’t exactly sure.

[Josh Vogel:]

I apologize. Then just to shorten it up, I just saw a big sequential increase in financial services revenue, and I was just curious if that where that came from. Was there a new win, an expansion, a bit of both as to what we saw in Luxembourg? Just curious what drove that?

[Filip Gydé:]

I think it’s a little bit of a mix of everything, Josh. Its definitely the infrastructure side in Luxembourg that’s help us, that’s also in Belgium and in France, there was higher activity towards the end of the year in the financial services market. But not one specific big contract, it was more like an overall increased activity.

[Josh Vogel:]

Okay, great. And just lastly, given the new digital transformation initiative and the investments there, again, outside of giving guidance, I’m just curious how we should think about SG&A this year relative to 2019 and 2020, and just kind of a base for how should we think about that?

[Filip Gydé:]

It sounds like a question for you too John.

[John Laubacker:]

Okay. Overall, we expect margins to go up as we just talked about, as you just asked, we just talked about with solutions margins themselves. And then within the concept of disengaging from a staffing, I think overall margin will increase. We know we’ve got to make continued investments in our solutions and our business development on that side of the business. And we’re going to continue, we plan to continue to do that. So from that perspective, we still think the operating margin goes up. So we think that within the direct or gross margin, we think that increases. We know that we’ve got to spend some more money to I think the SG&A increases, but we think at the operating income level, but that increases as well. Probably again, not sustainably, but we definitely believe that we can continue to improve on where we are from operations standpoint. I think we’ve used this in the past on calls. And when I talk about all the time, it’s a bit of a journey, right. There’s we know we’re not at the destination today, but we’re definitely headed down a path where there we’re going to see gradual improvement as time passes. And on the billable days for Q1 is 65 for the first quarter.

[Josh Vogel:]

All right, great. Well, I appreciate all the details insight, and impressive to see how the results ended up being in 2020 given everything going on, so good luck in 2021. And thanks again for taking my questions.

[Filip Gydé:]

Thanks, Josh.

[John Laubacker:]

Thanks, Josh.

[Operator:]

We have no further questions in the queue. At this time, we will turn the call back to management for any closing remarks.

[Filip Gydé:]

Thank you, Kierra. In closing, we are very pleased with our strongly growth in the fourth quarter reflecting on the past year, I’m very proud of our highly dedicated team that worked together to overcome challenges and what we as an organization ultimately accomplish. Despite the unprecedented environment, we not only rapidly adapt to the changing business landscape without any loss in productivity that we made significant strides into carefully expanding our solutions offerings, and how we deliver services to meet the evolving needs of our clients. We exited the year with growing momentum for our founding portfolio of digital transformation solution. And we are just getting started in terms of our realized the bench. Today, we have a solid foundation in place. And I’m excited about what we are positioned to achieve in 2021, as we accelerate CTG strategy and empower clients with the digital solutions required to succeed. With continued focused and disciplined execution of our strategic plan, I’m confident we will drive near and long-term success that results in meaningful value creation for all CTG stakeholders. Thank you for participating on today’s conference call and for your ongoing support of CTG. Kierra, you may now disconnect the call.

[Operator:]

That concludes our conference. Thank you for using Event Services. You may now disconnect.