Computer Task Group, Incorporated
Q4 2019 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. Welcome to the CTG Quarterly Investor Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instruction will be given at that time [Operator Instructions] As a reminder, this conference is being recorded.I'd now like to turn the conference over to your host, Jim Culligan. Please go ahead.
  • Jim Culligan:
    Thank you, Greg, and good morning, everyone. With me on today's call are Filip Gyde, CTG's President and Chief Executive Officer; and John Laubacker, Executive Vice President and Chief Financial Officer.Before we begin, I want to remind listeners that statements made during the course of this conference call that state the company's or management's intentions, hopes, beliefs, expectations and predictions for the future are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected. These forward-looking statements are based on information as of today, Tuesday, February 25, 2020. The company assumes no obligation to update these statements based on information from and after the date of this conference call.Additional information, concerning factors that could cause actual results to differ from those made in the forward-looking statements, is contained in today's earnings release, as well as in the company's SEC filings. In addition, the company's press release and management's statements during the call include discussions of certain adjusted non-GAAP measures and financial information. These financial measures and a reconciliation of GAAP and non-GAAP results are provided in both today's press release and the related Form 8-K.With that, I will now turn the call over to Filip for his opening remarks.
  • Filip Gyde:
    Thank you, Jim. Good morning to everyone joining us today on the phone and via webcast. The fourth quarter marked a strong finish to a highly successful year for CTG. Consolidated revenue grew 6.6% in the fourth quarter and 9.9% for the full year. Our results were driven by continued momentum in our IT Solutions business combined with expanding new engagements across Europe.For the full year, IT Solutions business grew 24.9%, contributing an increased mix of higher-margin business and significant improvement in operating profitability consistent with our strategy. As a result, both full year operating income and margin more than tripled year-over-year.Additionally, earnings per share increased to reach a four-year high in both the fourth quarter and for the full year. These strong financial results are confirmation that our strategy is working and is evidence of very solid execution by our team. Underlying our current strategic plan, there continues to be three fundamental objectives
  • John Laubacker:
    Thank you, Filip and good morning to those of you joining us on today's conference call. As reported in this morning's press release, consolidated revenue in the fourth quarter was $99.3 million compared with $97.2 million in the third quarter of 2019 and $93.1 million in the fourth quarter of 2018. Currency translation had a negative $1.3 million impact on revenue in the fourth quarter.Billable days in the fourth quarter were 65 compared with 63 days in the third quarter of 2019 and 64 days in the year ago fourth quarter. Solutions revenue in the fourth quarter of 2019 increased 15.2% sequentially and by nearly 27% year-over-year to $37.9 million representing 38.2% of total revenue. For comparison, Solutions revenue was 32.1% of total revenue in the fourth quarter of 2018.The increase in IT Solutions revenue reflects continued new business momentum in Europe driven in part by realized synergies from the acquisition of Tech-IT in early 2019. Staffing revenue in the fourth quarter of 2019 was $61.4 million or 61.8% of total revenue a decline of 4.5% sequentially and 2.9% year-over-year.Revenue from IBM in the fourth quarter was $21.4 million or 21.6% of total revenue compared with $21.3 million or 21.9% of total revenue in the third quarter of 2019 and $20.1 million or 21.5% of total revenue in last year's fourth quarter. No other client represented more than 10% of revenue during the fourth quarter or for the full year 2019.We have been working with IBM over the past several months to renew our contract. The contract has been extended on an interim basis to May 1, 2020 as the terms and conditions of a longer-term extension continue to be negotiated. Direct costs as a percentage of revenue were 79.6% in the fourth quarter of 2019 compared with 80.7% in the third quarter of 2019 and 81% of revenue in the year ago quarter.The GAAP operating margin in the fourth quarter of 2019 was 2.5% compared with 1.6% in the third quarter of 2019 and negative 0.8% in the year ago quarter. The non-GAAP operating margin in the fourth quarter of 2019, which excludes acquisition-related expenses was 3.1% compared with 2.4% in the third quarter of 2019 and 0.4% in the year-ago quarter. The GAAP and non-GAAP operating margins in the fourth quarter of 2019 were at the highest level in four years. The effective income tax rate in the fourth quarter of 2019 was 34% compared with 33.5% in the third quarter of 2019.GAAP net income in the fourth quarter of 2019 was $1.7 million or $0.12 per diluted share, which included $0.02 per share in acquisition related expenses and again we're at the highest level in four years. This compared with net income in the third quarter of 2019 of $0.9 million or $0.06 per diluted share, which included $0.04 per share in acquisition related expenses.GAAP net loss in the year-ago fourth quarter was $5.3 million or $0.39 per share, which included $0.06 per share in acquisition related and severance expenses as well as $0.36 per diluted share in tax related items.CTG's total headcount at the end of the fourth quarter was approximately 3,950 compared with 4,350 at the end of the third quarter of 2019 and 4,158 at the end of the year-ago fourth quarter. The year-over-year headcount decrease, primarily reflects a reduction in Staffing revenue I mentioned earlier as we transition away for some lower margin staffing business. Approximately 90% of our fourth quarter 2019 headcount was billable.Turning to our balance sheet. Cash and cash equivalents at the end of the fourth quarter were $10.8 million and we had $5.3 million of outstanding long-term debt resulting in net cash of $5.5 million. Capital expenditures in the fourth quarter of 2019 were $1.2 million, compared with $583,000 in the third quarter of 2019 and $371,000 in the fourth quarter of 2018.As outlined in this morning's press release, we published guidance for the full year 2020, which highlights our expectation to realize increased operating profits and continued year-over-year earnings growth -- earnings per share growth. Specifically for the full year, we anticipate revenue to be in the range between $380 million and $400 million and GAAP net income to be in the range between $0.32 and $0.38 per diluted share. Excluding acquisition related expenses, we expect non-GAAP net income for the full year to be in the range between $0.42 and $0.48 per diluted share.In support of these objectives we have recently taken advantage of select opportunities to aggressively transition away from less profitable staffing business as we accelerate our shift toward an increased mix of higher margin solutions business. Specific to the 2020 first quarter, we expect a three fewer billable days than the fourth quarter of 2019. And near-term headwinds associated with the transition away from the lower margin staffing business will result in revenue of approximately $87 million.However, because of an improved mix of business and operating performance, we expect earnings per share for the first quarter of 2020 to increase by approximately 50% over the first quarter of 2019.As indicated by our comments on today's call, we are very pleased with the team's focused execution on our strategy over the last year, which contributed to our exceptional results for both the fourth quarter and the full year 2019.As we progress throughout 2020, we believe our ongoing actions to transform the company and focus on being a solution centric enterprise will lead to further improvement in our operating results and result in another strong year for CTG.Before we move to the Q&A session, I'd like to address the offer received from one of our shareholders, Assurance Global Services on January 14. As we announced in the press release on that day, our Board in consultation with its advisers is carefully reviewing and evaluating the new proposal in the context of CTG's strategic plan. The Board and the management team are focused on creating value for our shareholders. Beyond that, we are not going to comment any further on this matter on today's call. We ask that you keep your questions focused on our results.Greg, could you please manage our question-and-answer session.
  • Operator:
    Thank you. [Operator Instructions] Your first question comes from the line of Kevin Liu. Please go ahead.
  • Kevin Liu:
    Hi, good morning and nice results from the quarter. First question I had, it doesn't look like it from the fourth quarter performance. But have you seen any impact on your business from either the macro uncertainty or the coronavirus news? Just curious how your customer base, and in particular some of the health care providers that you serve are responding to things in terms of better sales cycles given all these factors?
  • Filip Gyde:
    Hi, Kevin. Good morning. No, we haven't seen any specific effect of what's happening around the coronavirus. But obviously, we are monitoring what happens and where we have close conversations with all of our main clients. At this moment, there's nothing to report.
  • Kevin Liu:
    Great. And just turning to some of the changes you've made within your North American sales organization. Wondering if you could provide a little bit more detail just in terms of how your sales capacity might look coming into this year versus where you were a quarter ago. Any sort of changes in terms of incentive, in terms of the incentive plan? And what if any disruption you might anticipate from some of the efforts you've made?
  • Filip Gyde:
    Well, if you look to our sales team a year ago, we had different sales teams divided over the lines of business. What we have done now is we brought everybody together in one sales team under the same leadership using the same sales process, same KPIs, and as you mentioned, also same incentive program.We don't see disruption. We just see continued evolution as our incentive programs are fully in line with our transition to solution-centric organization. So, we are focusing our incentive program to reward Solutions business and make sure that all members of the sales team are focusing to sell our Global Solutions and in all parts of our business.And as we said, we are committed to grow our sales team. Now we have a strong structure. We have one process, one set of KPIs, it's all under one CTG approach. Now we're ready to grow that team further with the business to grow our Solutions business fast.
  • Kevin Liu:
    Understood. And just in terms of the strong solutions growth within the fourth quarter. It seemed like a lot of that came out of the Tech-IT organization or maybe the acquisitions you've made over the past two years. Could you just add a little bit more in terms of any sort of synergies that you're seeing from that? For instance, are you seeing success in selling those services in terms the old CTG base or vice versa? Just any more color would be helpful.
  • Filip Gyde:
    Yes. We're actually seeing it in both directions. We've seen the former CTG Luxembourg clients where we were selling now the Tech-IT services so hardware, software, cloud services. And we've also opened up our -- the Tech-IT clients for the CTG services. We're sharing consultants. We are answering RFPs together. And frankly, we are answering RFPs that none of us could have answered on our own before, and we're winning several contracts because of the combination.And that's the purely financial part of it. Obviously, if you look at being able to provide end-to-end IT Solutions, now not only in Luxembourg that all those solutions we can provide in to our clients in Europe, in Belgium, in France too that creates a very different competitive positioning going forward.
  • Kevin Liu:
    All right. Great. And then, just a couple of questions on the staffing side of the business. You guys mentioned that you had identified some more lower margin staffing work that you're not going to undertake this year. Can you quantify how much of a headwind to growth that is in your fiscal 2020 guidance? And whether your guidance currently contemplates everything you anticipate for going for this year or if you're still evaluating other opportunities that might not fit CTG going forward?
  • John Laubacker:
    Hi, Kevin, this is John. We have not quantified the specific amount that we have disengaged from so far to date, but it is a fairly significant portion. You may recall from my comments during the call that we were down sequentially in Staffing revenue and down year-over-year and that's a direct result from taking a look at opportunities to understand the work in front of us, how does -- what is that work? What is the client? What are the long-term prospects? How does it fit into our solution-centric plan and disengage from it? So, although we haven't disclosed a specific amount, that is what's strictly driving the decrease sequentially in year-over-year and Staffing.I will tell you that, we do anticipate that we will continue to look very critically at engagements as they come due. We have anticipated that we would disengage from a variety of work in 2020 like we did at the end of the second half and the end of 2019. And all of that is already worked into the guidance that we provided.
  • Kevin Liu:
    Got it. And then just on the IBM relationship you mentioned you have an extension through May here as you negotiate a longer term agreement. I think for the past renewal -- I mean the past two, it's been more sort of kind of a one year extension. Can you just talk about any sort of changes you'd anticipate in this contract in terms of either the duration or the scope of services that you're providing?
  • John Laubacker:
    Yes. I don't think that we're looking at a significant change of scope of services that we're providing. Typically, in previous renewals and you had mentioned this that the IBM starts that negotiation process within the last three months of the last quarter or so before an expiration. And we did start talking to them about the things that they were thinking and the opportunities that they wanted to see in a new engagement.And at this point in time, as you know, as I'm sure you're aware, there's been some changes in the IBM side of the fence as well with leadership. And so, the process has gone relatively slowly. We have a great relationship. We're in great conversations with them, have no concerns about the extension of the contract. But for now, it's been extended for four months to May 1. And as we continue to negotiate the terms and conditions going forward, we expect it to be in place. And I can't say it will be the same as it's been in the past, but we feel good about all the discussions we've had today.
  • Kevin Liu:
    All right. Well, thank you for taking the questions. Congrats on the strong finish to 2019 and good luck you in 2020.
  • John Laubacker:
    Thanks, Kevin. Appreciate it.
  • Operator:
    [Operator Instructions] And at this time there are no further questions.
  • Jim Culligan:
    Thank you, Greg. We were pleased to close out a very successful year with strong fourth quarter results which included...
  • Operator:
    Mr. Culligan, please go ahead.
  • Jim Culligan:
    Okay. We were pleased to close out a very successful year with strong fourth quarter results, which included earnings at multiyear high. I extend my appreciation to the entire CTG team for their dedication and efforts without which our accomplishments of the past year would not have been possible.Entering 2020, growth of our IT Solutions business will continue to serve as a fundamental driver of profitability improvement. We are actively working to accelerate the transformation of our business and further expand CTG's global solutions offerings, which will enable us to deliver value to our clients, while also capitalizing on the increasing mix of higher-margin business.Focused execution on our strategic plan will remain paramount to achieving our objectives of increased profitability and sustainable long-term growth. Both of which we believe are fundamental to our priority of successfully unlocking significant value for CTG shareholders. As always, I want to thank you for participating on today's conference call and for your continued support of CTG. Greg, you may now disconnect.
  • Operator:
    Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you, for your participation and for using AT&T teleconferencing. You may now disconnect.