Computer Task Group, Incorporated
Q4 2014 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2015 CTG Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Jim Culligan, Director of Investor Relations. Please go ahead.

[James M. Culligan:]

Thank you, Kathy, and good morning everyone. We certainly appreciate your timing and interest in CTG. On the call today, we have CTG’s newly appointed Chief Executive Officer, Cliff Bleustein who will provide some introductory comments, our CFO, Brendan Harrington, and Treasurer John Laubacker will follow with the review of the results for the first quarter of 2015 and then update on the Company’s strategies and outlook. We’ll follow with an opportunity for Q&A. If you don’t have the news release discussing the financial results, you can access it at the Company’s website at ctg.com. Before we begin, I want to mention that statements in the course of this conference call that state the company’s or management’s intentions, hopes, beliefs our 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 this date. 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 in the forward-looking statements is contained in our earnings release, as well as in the company’s SEC filings. You can find these in our website or the SEC’s website at sec.gov. Please review our forward-looking statements in conjunction with these precautionary factors. Cliff Bleustein joined CTG on April 6, after spending two years at Dell Services where he was Chief Medical Officer and global provider solutions leader responsible for managing consulting teams and growing the practice. He was also responsible for the groups go-to-market strategies and results. Prior to his time at Dell Cliff spent five years in Price Waterhouse Coopers health advisory practice where he managed teams of consultants while delivering consulting services to healthcare providers and growing PWC’s practice. He as an MD and spent over 10 years practicing medicine doing medical research and teaching others in the specialty of urology. In addition, to his expensive medical training Cliff earned an MBA at NYUs Stern School of Business where he recently served as an adjunct professor of healthcare economics. With that, introduction I’d like to turn it over to Cliff to begin the discussion.

[Clifford Bleustein:]

Thanks Jim and good morning everyone. I am honored to speaking to you today as CTG’s Chief Executive Officer. I would like to take this opportunity to thank the Board of Directors for their vote of confidence and then trusting me with the leadership of this great company. I would like to share with you a few reasons why I was attracted to CTG. First, I saw the company with a solid balance sheet, no debt and a sizeable cash position which provides flexibility needed to grow the business. Second, I was impressed to CTG’s performance in Europe, where I spent time as a business unit leader. I know how difficult it is to be successful in Europe and CTG has an established well run operation in Belgium, Luxembourg and the UK that we can leverage for growth. CTG has been recognized as the best place to work for several years in each of the three countries where we do business. Third, the company staffing business is on solid footing and although not a hard margin business it generates cash and has a high quality client list. In fact, CTG was ranked as a 17th largest staffing company in the U.S. in 2014 report published by the independent research group staffing industry analysts. Lastly, I believe there is a tremendous potential for the company’s solutions business. The opportunities in the healthcare market are real and CTG has an established practice and a recognized name that was service foundation we can build upon. In 2014, we were cited by modern healthcare as having the 12 largest healthcare consulting practice. This on the heels for the similar ranking published for healthcare informatics earlier in the year I also intuitively believe the company’s other solution verticals namely energy and financial services, our growth industries and a good complement to our healthcare focus. In my first three weeks at CTG I spent time getting to know the company’s leadership team. I believe it’s a strong experienced team committed to the success of CTG and its clients. I also met with some of our healthcare consultants at the recent HIMSS conference and was impressed by their energy, talent and desire to innovate. HIMSS also afforded me the opportunity to meet a few CTG’s healthcare client. My message to them was that they are important to CTG and I welcome their feedback on how we can become better partners. I will take the same message to other CTG customers across all of our markets during the next few months. In fact, I am traveling to Europe next month to review our operations and then gain feedback from our clients there. Finally, I would like to thank you, our shareholders, analysts and other interested parties for participating in today’s call. I look forward to speaking with many of you in the coming months, when I have a better field for our roadmap to the future. You were certainly an important part of our equation for success. I will now turn the call over to Brendan and John for discussion of our first quarter results. Brendan?

[Brendan M. Harrington:]

Thanks, Cliff. Good morning everyone and thanks for joining us this morning. As you’ve seen in our news release earnings per share for the first quarter were $0.08 which was a mid-point of our guidance provided in our February earnings release. In aggregate, our revenue declined by 0.4% in 2015 first quarter compared with last year's quarter. There were four more billing days in the first quarter 2015 compared to the first quarter of 2014. Revenue from our solutions business which represented 33% of our total revenue decreased by 16%. The decline in our solutions business almost call came from the healthcare vertical, where we saw the continued impact of several significant EMR projects that ended during 2014. We started the first quarter of 2015 with seven active EMR projects. During the quarter, one new project started and therefore at the end of the first quarter, we had eight active EMR projects. However, these projects are smaller than the EMR engagements we’ve historically worked on. We continue to believe that our EMR business will be constrained in 2015 compared to 2014. While the demand for large scale EMR supportive decline, there is increasing demand in the healthcare market for external assistance in other areas where CTG is offering to support these changing client needs. More hospitals are looking to realize the full value of their significant EMR investments by looking for external consulting help in the areas of EMR post-implementation support, optimization support and application management outsourcing. Our staffing business increased by 7.9% compared with the first quarter of 2014 or about 3% on approved billing day basis as we saw a pickup in demand in the U.S. Our revenue from the technology service provider market which is our lower margin staffing business increased in the first quarter of 2015 by 14%. We saw an increase demand in the quarter from our largest customers current need for external IT resources. However, this increase demand was offset by the transition of IBM’s x86 server division to Lenovo which was effective October 1, 2014. We retained a significant share of this business which subsequent to the transition is included in the general markets vertical. Our financial services vertical which is concentrated in European markets had a revenue increase of 3% in local currencies which was offset by the stronger U.S. dollar. Our energy business revenue decreased approximately 9.5% when compared to the first quarter of 2015 mainly due to the effect lower oil prices are having on our energy customers. Our European business experienced growth in local currencies during the first quarter of 2015 of approximately 4% and now represents approximately 18% of our consolidated revenue. The growth in Europe is primarily from expanding our work with government agencies and financial services organization. I am going to talk more about our expectations for the second quarter and the full-year, but I am first going to ask John to review our financial results. John?

[John M. Laubacker:]

Thanks Brendan. Good morning everyone. In addition to these comments please see a summary sheet of other financial information at the end of today’s earnings release, which provides a quick overview of our key financial information in one place. For the 2015 first quarter CTG’s revenue was $97.5 million, a decrease of $0.4 million or 0.4% is compared with the 2014 first quarter. The decrease was primarily due to lower revenue in our healthcare solutions business and the weakness in value of the euro offset by a modest strength in our staffing business and additional billable days in the 2015 period. The 2015 first quarter had 66 billing days as compared with 62 days in the 2014 first quarter. 2015 first quarter revenue from IBM, our largest customer, was $23.2 million or 23.8% of revenue as compared with $21.5 million or 22% of revenue in the 2014 first quarter. Additionally in the 2015 first quarter our revenue at Lenovo generated through [STI] International a vendor manager for Lenovo was $13.6 million or 13.9% of revenue as compared with $7.3 million or 7.4% of revenue in the 2014 first quarter. The increase in revenue with Lenovo in 2015 was in part due as Brendan previously mentioned to the sale of IBM’s x86 server division to Lenovo, which was effective October 1, 2014. Direct costs, as a percentage of revenue were 82.2% in the 2015 first quarter as compared with 78.6% of revenue in the 2014 first quarter. The increasing costs in 2015 is primarily due to the significant shift in our business mix to a much higher level of staffing which is a higher direct cost as compared with our IT solutions business. Additionally we experienced pricing pressure from a large staffing customer in the 2015 first quarter as compared with 2014. This pricing pressure related to this customer began in mid-2014. SG&A expenses were 15.5% of revenue in the 2015 first quarter down from 15.8% of revenue in the 2014 first quarter, primarily due to disciplined cost control. The effective tax rate for the 2015 first quarter was 42.5% as compared with 41.1% in the 2014 first quarter. The federal research and development tax credit and work opportunity tax credit were not passed by the US federal government for the respective periods, which is causing a higher effective rate in these periods. If these tax credits are passed in 2015 we anticipate our annual effective tax rate to be approximately 38% to 40%. Net income in the 2015 first quarter was $1.3 million, a decrease of $1.9 million as compared with the 2014 first quarter. On a per diluted share basis, net income was $0.08 in 2015 as compared with $0.19 in 2014. The 2015 and 2014 first quarter results include equity based compensation expense of approximately $0.02 per diluted in both periods net of tax. Our headcount at the end of the 2015 first quarter was 3,900 people, 100 people more than at the end of the trailing 2014 fourth quarter and 200 more than at the end of the 2014 first quarter. The increase in headcount from the end of December primarily relates to increased demand from our largest clients in our staffing business. Of the 3,900 employees at the end of the 2015 first quarter approximately 92% were billable resources and 8% were non-billable. Our days sales outstanding were 65 days at the end of both the 2015 and 2014 first quarters and one day less than 66 days at the end of the 2014 fourth quarter. Our cash used in operations in the 2015 first quarter was approximately $4.4 million as compared with cash used in operations were approximately $9.3 million in the 2014 first quarter. 2014 first quarter, ended on a payroll day while the 2015 first quarter ended between payroll days. In the 2015 first quarter we incurred $512,000 in capital expenditures and recorded depreciation expense of $597,000. Finally, we repurchased 99,000 shares of CTG common stock during the 2015 first quarter at an average price of $7.99 per share. As of today our repurchase authorization totals approximately 530,000 shares and we intend to continue purchasing shares in 2015 under net authorization. Brendan?

[Brendan M. Harrington:]

Thanks, John. As to our expectations for the second quarter of 2015, we are forecasting total revenue to be in the range of $93 million to $95 million. We are forecasting earnings per share in the second quarter of 2015 to be in the range of $0.09 to $0.11 per diluted share, a 50% decrease from the 2014 second quarter at the midpoint of our guidance. For the 2015 full year, we currently expected revenue range of $375 million to $389 million or 3% lower at the midpoint of guidance when compared to 2014. Based upon our revenue forecast and the anticipated mix of business, we expect our 2015 net income per diluted share to be in the range of $0.35 to $0.45 or a 38% decrease from 2014 at the midpoint of our guidance. Looking at the mix of revenue guidance for the year we currently estimate that our healthcare solutions revenue will decline by approximately 18% in 2015. For our non-healthcare solutions business we are projecting revenue will decrease by 7%, primarily due to lower oil prices for energy clients and the weakness of the value of the euro for much of our financial services business. We are forecasting a 4% increase in our staffing business for the year driven by several customers. With that I would like to open the call to questions. Operator, can you please manage our question-and-answer period.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from the line of Rick D'Auteuil with Columbia Threadneedle. Please go ahead.

[Richard G. D'Auteuil:]

Good morning.

[Clifford Bleustein:]

Good morning.

[Brendan M. Harrington:]

Good morning Rick.

[Richard G. D'Auteuil:]

Welcome on board Cliff. So a quarter ago Brendan we talked about making investments in some growth initiatives and there is - the last paragraph in the press release has also referenced some thoughts on growth. Just give me a sense of what you are spending on these growth initiatives and what you didn’t cover here and I assume it’s because we don’t really have any thing is all the software verticals that last year contributed some, but aren’t contributing right now. Love to hear the thoughts on from Cliff on where those what’s your thoughts on the opportunity on those verticals are?

[Clifford Bleustein:]

Okay, yes thanks Rick. With regard to the data analytics area we are continuing to build those capabilities and we are continuing to work the pipeline there especially with regard to our medical model, so we continue to pursue opportunities there and like I said to build out the capabilities. In addition to that as you know we’ve had significant reduction in our EMR business and we are focused on some other services around healthcare specifically on our advisory services practice relating to EMR optimization, revenue cycle and application management. So we are making a shift from our EMR showcased to some of these opportunities that we see or other services for the healthcare group. especially around those services that I mentioned including potential opportunities for population health management.

[Richard G. D'Auteuil:]

Can you put a number on what we’re spending on the growth initiatives that aren’t yet providing any return I think there were some hiring going on there?

[Brendan M. Harrington:]

We have basically been doing some hiring to add to our advisory services group basically putting some resources in place in order to build out those practices and build the pipeline of opportunities with our clients. I don’t have specific numbers that I’ll give you with regard to those, but to say that we are looking at them we have been adding to our advisory services practice. Any investment really is in the people to build those capabilities and build the offerings that we haven’t continued to and well portion of those people are billing as well, so there is a component to those individuals of building the offerings and talking to clients about opportunities and then doing some of that work on their own as well. So they have billable components and we look to try and cover some of the costs that those people would have by them generating revenue themselves.

[Richard G. D'Auteuil:]

And other thing that you had some recent success in is some of these healthcare related outsourcing opportunities that were non-referenced here today, any successes there?

[Brendan M. Harrington:]

We continue to see opportunities there, clients are definitely looking to outsource that - some of their applications, we continue to see good activity there, we didn’t have any wins of significance that I would – and that’s why we didn’t put anything into the comments, but we continue to see good opportunities on the application management front.

[Richard G. D'Auteuil:]

Okay, and then Cliff the last paragraph that says I believe CTG’s fundamentals or it sound I plan to review and modify a business with unit strategy is necessary, give us a sense if you could preview where are you going with that statement, shareholder value is that is obviously important to us and what your thoughts are related to that?

[Clifford Bleustein:]

When you look at CTG the staffing business itself in the first quarter is definitely showing growth and we were rated as the 17 largest firm in the U.S. and companies in low margin businesses as they get larger and continue to grow and get scale more often than not their margins have a tendency to improve. So ultimately you have a solid staffing business that is already growing, that continues to add resources to enhance the capacity to grow further as that market overall continues to grow. So when you look at the industry reports on staffing business that market itself is essentially growing. The EMR business in 2012, CMS spent just under $10 billion to help implement to meaningful use one, in 2013 they spent just over that and in 2014 that number dropped to under $5 billion. So some of the softness that all consultancies are seeing in EMR business has to do with being at the tail end of meaningful use one implementations within the United States and a result of those organizations having already done their big bang. But as we look at our core competencies we still have a very solid EMR business and that solid EMR business is migrating towards what the market is showing to be more optimization work and process improvement work as these EMRs continue to be running and need us in both cutting costs as well as building the efficiencies around that. I think I’ve only been at the company for three weeks, so I’m looking at each of the other business units from oil and gas to European operations to our medical analytics and products groups to see what additional changes and strategy if we need to can be done to either decrease the costs that we have or improve the revenues associated with it. But that’s a process that takes some time in order to go through that thoroughly.

[Richard G. D'Auteuil:]

Okay. Do you have any thoughts on data analytics opportunities there as Brendan suggested we’re going to continue to purse the medical model, but there was a fraud, waste, and abuse and there were big data, what are your early thoughts on those opportunities or have they likely passed you by?

[Clifford Bleustein:]

The industry has a need for the conversion of data into information and we at CTG have significant capabilities for creating the data governance, the date platforms, and the creation of the unified data sets, the data normalization and standardization as well as the analysis of that. All of those capabilities are already within the company and go above and beyond any product in and of itself. So as you look towards the strategy there is clearly an ability to leverage the assets that we have in multiple different venues and I would expect that as continue to evaluate it we will find some other opportunities for the people that we currently have employed.

[Richard G. D'Auteuil:]

And then lastly on the healthcare side of the business do you think you are staffed appropriately given the pullback in EMR especially, it felt like we were running a little bit high on the bench time in the past a little slow to recognize those declines in the market, what are your thoughts on that?

[Clifford Bleustein:]

So, I have been successful in the past at looking at that. The first evaluations of CTG and their bench policy appears to be appropriate, so that it doesn’t look is it bench time is increasing, so I think as of now it looks like that’s appropriately being mange, that we are still, I still need to do further analysis related to the entire cost structure of the entire group as we make changes many of the assets that were adding as Brendan has already said are billable from the beginning. So when you’re talking about the investments per say these are consultants that more often and not are required to be billable to cover their own costs as well at the same time they are building new solutions backs for the marketplace.

[Richard G. D'Auteuil:]

Okay, thank you.

[Operator:]

Thank you. Our next question will come from the line of Kevin Liu with B. Riley & Co. Please go ahead.

[Unidentified Analyst:]

Good morning, this is actually [indiscernible] stepping in for Kevin.

[Clifford Bleustein:]

Good morning.

[Unidentified Analyst:]

Just first question here, what changed in terms of the 2015 annual revenue outlook that you had to bring it down I think it was about $5 million, $6 million on the top end. Can you give us some more color on that please?

[Brendan M. Harrington:]

We’ve tightened a range a little bit but the midpoint dropped by about $3 million and virtually all of that is related to the Euro in effect that the US dollar has gotten stronger and its continue to project that based on most recent exchange rates. So like I said the vast majority of that is the headwind in the euro conversions of the US dollars.

[Richard G. D'Auteuil:]

Okay understood. And what’s given that you’ve only been here about three to four weeks or so. Can you maybe touch up on how you may view acquisitions and if there would be an integral part of the strategy?

[Clifford Bleustein:]

As I said, in the beginning one of the things that attracted me to CTG was the fact that they did not have any debt and that they had significant cash reserves that certainly create opportunities for growth as we move forward I think the first aspect is to understand what you have before you start moving into the next stage about thinking about what your options are going forward. But I am not leaving any options off of the table. I think we need to look at all options and acquisitions are one of the options that you have for growth.

[Richard G. D'Auteuil:]

Okay understood thank you so much.

[Operator:]

Thank you and our next question will come from the line of Bill Sutherland with Emerging Growth Equity. Please go ahead.

[William Sutherland:]

Thank you good morning and welcome to CTG Cliff. I actually Brendan I had a question on EMR and just whether you can give us kind of that revenue number for the quarter?

[Brendan M. Harrington:]

Yes, EMR was $7.3 million and last year it was $13.5 million, it was down about 46%.

[William Sutherland:]

And that’s actually I guess with the extra days its up slightly from Q4, so it feels like it’s going stable here?

[Brendan M. Harrington:]

We added our project in the first quarter, for the Q1 to Q4 stable I think that as you know as these projects typically have a certain lifespan, we’ll certainly see some of those projects fall off as the year goes on.

[William Sutherland:]

Are you well pre-active in terms of marketing post implementation and optimization kind of services do you think and you feel like there is pretty convertible pipeline as far as near term there?

[Clifford Bleustein:]

So pipeline in and of itself is always by definition convertible, I think many of the opportunities that we are seeing in the marketplace around EMRs as the entire market has changed is moving more towards process improvement, optimization and cost containments projects within the EMR space. So I think that’s certainly where the industry appears to be going. Mergers and acquisitions are also a bigger area as organizations are acquiring other hospitals and that plays well in two of our areas, one is legacy support and the other is EMR work.

[William Sutherland:]

I am just trying to get a feel for the kind of growth prospects for healthcare solutions thinking about how you’re transitioning EMR and whether you are getting traction, AMO and potentially I haven’t heard and you mentioned of ICD10 whether there is any project outlook there?

[Brendan M. Harrington:]

Yes, Bill the projection for the full year with regard to healthcare solutions we expected to be down about 18% for the year and EMR business was down about 36% in our projection year-over-year, we are definitely anticipating that to fall off a little bit.

[William Sutherland:]

Okay, I will do the math and see what the others – what the other parties, what the offset is and then on ICD10 any opportunities there for you guys?

[Clifford Bleustein:]

So the ICD10 market is an interesting market in the sense that after the delay last year many organizations put on hold all their ICD10 projects. We haven’t seen a huge uptick yet and clients looking to revive those programs and start new ICD10 programs what I am hearing from clients more often than not is that they are waiting to see if congress is going to delay it again or not and I think some of them are taking a more watch and wait approach then going straight into doing the implementations that we did before.

[William Sutherland:]

We all know that there won’t be any time at this point for those people, then what they all - hoping October comes and goes.

[Clifford Bleustein:]

Yes, I understand that, but I can’t change what clients believe that the market is.

[William Sutherland:]

Okay and finally for me on the medical model you are all were in discussions with payers regarding the first module [indiscernible]. Any progress report there?

[Brendan M. Harrington:]

We continue to talk to some payers with regard to the medical model and there is some resistant in terms of commitment on their end to go ahead with starting up projects and again we’ve definitely seen that sales cycle take much longer than we’ve anticipated in terms of trying to convince them that this is something that they ultimately will benefit from and see significant cost saving. So we’re still in those discussions but the discussions are really trying to help them convince them that there is real savings there.

[William Sutherland:]

Does it move towards demonstration you know projects with these guys or how do you - we think the next step is?

[Brendan M. Harrington:]

I think it is in terms of the demonstration and basically trying to convince a payer in order to allow us to implement it and ultimately show those results. So that really is what we’re trying to get them to work with us on.

[William Sutherland:]

Okay. Thanks everybody.

[Brendan M. Harrington:]

Thank you.

[Clifford Bleustein:]

Thank you. End of Q&A

[Operator:]

Thank you. [Operator Instructions] And we currently have no further questions in queue.

[Clifford Bleustein:]

So I would like to once again say I am pleased and to lead great company like CTG. I look forward to leading the company to profitable growth in the coming years, by leveraging the talent we have in the organization to assist our clients with their various needs, thereby increasing value for our shareholders. Thank you for your support and for joining us this morning.

[Operator:]

Thank you. Ladies and gentlemen this conference will be available for replay after 10