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Executives

Jim Culligan – Director, IR

Jim Boldt – Chairman, President and CEO

Brendan Harrington – SVP and CFO

Analysts

Brian Kinstlinger – Sidoti

Bill Sutherland – Northland Capital Market

Vincent Colicchio – Noble Financial

Kevin Liu – B. Riley

Frank DiLorenzo – Singular Research

Rick D’Auteuil – Columbia Management

Frank Sparacino – First Analysis

Computer Task Group, Inc. (CTGX) Q4 2012 Earnings Call February 19, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CTG Fourth Quarter 2012 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct question-and-answer session and instructions will be given at that time.

(Operator Instructions). As a reminder, today’s conference is being recorded.

And I’d now like to turn the conference over to our first speaker, Director of Investor Relations, Mr. Jim Culligan. Please go ahead.

Jim Culligan

Thank you, Brian. Good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today, we have CTG’s Chief Executive Officer, Jim Boldt; and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results for the fourth quarter of 2012, and then update you on the company’s strategy and outlook. We’ll follow with an opportunity for Q&A. If you don’t have the news release discussing our financial results, you can access it at our website at ctg.com.

Before we begin, I want to mention the statements in 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.

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 at our website or the SEC’s website at sec.gov. Please review our forward-looking statements in conjunction with the precautionary factors.

With that, I’d like to turn it over to Jim to begin the discussion.

Jim Boldt

Thanks, Jim, and good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our fourth quarter earnings conference call. As you saw in our news release, we had an excellent fourth quarter with revenue increasing 7% over 2011 and earnings per share excluding the life insurance gain increasing 20%. Revenue was at the low end of our guidance, and earnings per share excluding the insurance gain was at the high end of our guidance. As we expected, our higher margin Solutions business continues to grow and increased 12% in the fourth quarter of 2012, while revenue from our lower margin Staffing business grew by approximately 3% when compared with the fourth quarter of 2011.

I’m going to talk more about our results and what we see for the 2013 first quarter and full year. But first I’m going to ask Brendan to start us off with the review of our financial statements. Brendan?

Brendan Harrington

Thanks, Jim. Good morning, everyone. For the fourth quarter of 2012, CTG’s revenue was $107.9 million, an increase of $7 million or 6.9% compared with the fourth quarter of 2011. Fourth quarter 2012 had 64 billing days, one more day then in the fourth quarter of 2011

Solutions revenue in the fourth quarter of 2012 increased $5 million or 12% compared to the fourth quarter of 2011, and totaled $45.3 million. As a percentage of total revenue, Solutions revenue was 42% compared with 40% a year ago. The continued improvement in our business mix is mainly being driven by revenue growth from more profitable healthcare projects. Staffing revenue in the quarter increased $2 million or 3.4% to $62.6 million.

Fourth quarter revenue from IBM, our largest customer was $27.9 million compared with $27.4 in the fourth quarter of 2011. As a percent of total revenue, revenue from IBM decreased to 25.8% in the 2012 fourth quarter, compared with 27.2% of total revenue in the 2011 fourth quarter.

Our revenue from IBM in the quarter was negatively impacted by approximately $2.1 million, when compared with the fourth quarter of 2011, as a result of IBM spinoff of its retail business to another large company. Although this change lowered our revenue from IBM, the spinoff had no impact on CTG’s overall revenue since we’ve retained the business with this new client.

Revenue from our European operations was $18.3 million and 11% increase from the $16.5 million recorded in last year’s fourth quarter. The effect of foreign currency fluctuations during the fourth quarter of 2012 decreased consolidated revenue by approximately $700,000 or 0.6%. On a local currency basis, our European revenue increased by 15.2% compared with the 2011 fourth quarter.

Direct costs as a percentage of revenue were 78.3% in the fourth quarter compared with 77.4% in the fourth quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.8% from 17.2% in the fourth quarter of 2011. The billable travel expenses included in the fourth quarter of 2012 revenue and direct costs are $3.2 million. The billable travel expenses for the fourth quarter of 2011 totaled $3.3 million.

Fourth quarter operating income grew to $6.4 million, an increase of $939,000 or 17% year-over-year. Operating margin in the fourth quarter increased to 5.9% of revenue, a 50 basis point improvement from last year’s 5.4%. The year-over-year increases in operating income and margin were due primarily to the increase in the Solutions business in our sales mix and the additional operating leverage.

Net income in the fourth quarter includes the gain on non-taxable proceeds from a life insurance policy of $845,000 or $0.05 per diluted share. Excluding this gain on life insurance proceeds, net income was $4 million an increase of $735,000 or 22% compared to the fourth quarter of 2011. On a per diluted share basis, excluding the life insurance gain, net income was $0.24 for the quarter, an increase of 20% compared to the fourth quarter of 2011. Both the 2012 and 2011 fourth quarter results include equity compensation expense of approximately $0.02 per diluted share net of tax.

The tax rate for the 2012 fourth quarter was 32% compared with 38% in the 2011 fourth quarter. The primary difference in the tax rate for the quarter is that the life insurance proceeds are non-taxable. We expect the tax rate for the full year in 2013 to be between 37% and 39% compared to 38.4% for 2012, excluding the approximately $1.3 million of non-taxable insurance proceeds that we received in the second and fourth quarters of 2012.

Our head count at the end of the fourth quarter was 3,900, 100 people or 3% higher compared to the end of the third quarter 2012. Of the 3,900 employees at the end of 2012, 90% were billable resources. At the end of 2012, we had no debt and $40.6 million of cash on the balance sheet compared to $22.4 million of cash at the end of 2011.

Both 2012 and 2011 ended between U.S. biweekly payroll base. Our day sales outstanding was 61 days at the end of 2012, one day lower than at the end of 2011. Our cash provided by operations in the fourth quarter of 2012 was approximately $11.4 million that compared with approximately $10.2 million in the fourth quarter of 2011.

In the quarter we had 778,000 in capital expenditures and recorded depreciation expense of 943,000. We repurchased approximately 25,000 shares of CTG common stock during the fourth quarter of 2012. As of today, our repurchase authorization is for approximately 535,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2013. Jim?

Jim Boldt

Thanks, Brendan. As I mentioned in aggregate our Solutions business, which is significantly more profitable than our Staffing business increased by 12% in the fourth quarter 2012. The Solutions business was 42% of our total revenue in the fourth quarter. The growth in Solutions work is primarily coming from healthcare projects and is continuing to drive margin expansion. Overall, our Healthcare Solutions business was up 15% over the fourth quarter of last year.

And at our conference call at the end of October, we mentioned that we’d received three RFPs for electronic medical record projects, for which the hospitals had not decided what IT services firms would be awarded those projects. In addition, we received four RFPs for EMR projects since then. Of those seven projects, we won three projects, lost one project, one RFP was withdrawn and we still have two bids outstanding for which an IT services firm has not been selected.

When we started the fourth quarter 2012, we had 18 active EMR projects. During the fourth quarter, one project came to an end. Therefore at the end of the fourth quarter 2012, we had 17 active EMR projects.

In 2013, we expect our EMR work will continue to grow as the size and scope of the engagements continues to increase. As we mentioned before, currently we have a significant amount of opportunity for EMR business, while we expect continued growth in EMR work, competition for the limited number of resources with EMR experience, challenges our ability to grow our EMR business to its full potential until the market begins to accept newly trained staff.

Our Software-as-a-Service or SaaS offerings are beginning to contribute to our growing profitability while still only approximately 1% of our total revenue, our IT medical and management, and fraud, waste and abuse offerings added approximately $0.02 to earnings per share in the fourth quarter of 2012, when compared to the fourth quarter of last year.

Having covered healthcare, I’d also like to talk about the other three vertical markets on which we focus, our technology service provider market, which is an all Staffing business increased by 1% in the fourth quarter. As to our energy and financial services verticals, both increased during the fourth quarter of 2012.

Turning to our Staffing business, its revenue was up 3% when you compare the fourth quarter of 2012 to the fourth quarter of 2011. We depict our Staffing business is improving in the fourth quarter of 2012. If you look at our Staffing business in local currencies, revenues increased by 4% in the quarter.

Looking at the first quarter of 2013, we’re forecasting total revenues to be in the range of $107 million to $109 million or a 4% increase in the midpoint of our guidance over last year’s first quarter. We have one last billing day in the first quarter of 2013, which is limiting our revenue growth.

We’re forecasting earnings per share in the first quarter of 2013 to be in the range of $0.23 to $0.25 per diluted share or a 20% increase over 2012 at with the midpoint of our guidance.

For the 2013 full year, we expect a revenue range of $450 million to $460 million or a 7% increase in the midpoint of our guidance over 2012. Based upon our revenue forecast and the anticipated mix of business, we expect 2013 net income per diluted share to be in the range of $1.02 to $1.12 or a 22% increase from 2012 at the midpoint of our guidance, excluding the gains from life insurance proceeds in 2012.

We thought it’d be helpful to briefly share our thinking on how we set our guidance for this year. We currently are seeing a tremendous amount of opportunity in our healthcare business. We think our Healthcare Solutions business will grow by approximately 20% in 2013, given the opportunities in the market we could grow faster than that, however, there are significant shortages of experienced IT labor in the market with healthcare to our experience, and our customers are not yet willing to accept reasonably trained staff. We therefore believe resource availability will continue to be the limiting factor for our growth in our healthcare business in 2013.

For our Non-Healthcare Solutions business, we’re projecting a revenue increase of approximately 3% in 2013. We forecasted a 2% increase in our Staffing business in 2013. This assumes that there is a slow, tepid growth in U.S. and European economies.

We are very optimistic about CTG’s growth going forward. Our Staffing business is showing signs of improving, and will continue to do so as the world’s economies improve.

Our U.S. healthcare business continues to grow particularly as some of the larger hospital systems begin EMR projects, with the recent acquisition of etrinity, a Benelux Health IT consulting firm. We positioned CTG to participate in the adoption of U.S. package software by European hospitals where those implementation projects will most likely not start until the latter part of 2013 or the beginning in 2014. The European adoption of U.S. software gives us the potential to create a European healthcare business, which conceivably over time could grow the size of our U.S. healthcare business.

We’ve been working on approximately half a dozen datas with states and payers over the last 12 months for our fraud, waste and abuse application. While these opportunities have very long sales cycles, we are hopeful that we’ll begin to close some of those opportunities in 2013. We are currently building out our IT medical management model for four more severe and current diseases, that means that by the end of 2013, the IT medical model will be capable of handling five of the 10 current diseases that account for approximately 70% of all of their costs in the U.S.

We are also working with clients to combine genomic with electronic medical records. This will only be the third time that we know how this combination has been done. This work will position CTG with one of first of its kind cutting-edge offerings in the genomic science field.

We think that if you look at where CTG is positioned in healthcare, the world’s fastest growing industry. You can see why we’re so optimistic about our future growth opportunities. Given our optimism about the future, we thought that it was time for CTG to pay a dividend. Based on our news release, our Board declared a quarterly dividend of $0.05 per share. On an annualized basis the quarterly dividend at that rate would represent an approximate return to shareholders of 1%.

Given CTG’s strong earnings and cash flows, we believe we can pay a dividend at their rate and still provide adequate cash for operations, fund, our stock repurchase program, and allow us to do strategic acquisitions.

With that, I’d like to open the call for questions if there are any. Operator, would you please manage our question-and-answer period.

Question-and-Answer Session

Operator

Of course. (Operator Instruction) First question today comes from the line of Brian Kinstlinger with Sidoti. Please go ahead.

Brian Kinstlinger – Sidoti

Great. Thanks so much.

Jim Boldt

Good morning.

Brian Kinstlinger – Sidoti

How are you?

Jim Boldt

Good.

Brian Kinstlinger – Sidoti

You mentioned two RFPs, you’re still awaiting awards. I’m interested in the pipeline outside of RFPs, how many large hospitals, would you say you’re in discussions with you expect in the first half of the year will come due starting RFP process?

Jim Boldt

That’s difficult to say. As the matter of fact even internally, we can’t come up with that number. The problem is we can talk to hospital for a year and they seem interested, but if they don’t have their funding, or they’re just not ready to do it, they don’t issue an RFP, but I can tell you is that the size of the hospital systems is getting larger, and we expect that to continue this year. One of the two for instance, hospital systems will receive the RFP actually unless particularly when we haven’t answered, yet the RFP just came in recently, is about four times the size of our average engagement currently. So, it is about 5,000 beds, and on average we’re probably close to around 1,200 to 1,300 beds.

So if we win that particular one, we’ll probably need four times the number of people. And there is another system that we’ve talked about before that’s even larger than that. They’re in the planning phase now, we think that they are probably going to come out with an RFP, and RECs in the second quarter of the year, and but that hasn’t happened yet. But we think that, it isn’t going to be so much the number of RFPs this year. I think it’s going to be more the size of the opportunities that’s going to drive our business.

Brian Kinstlinger – Sidoti

And it seems like that there was two large projects, it doesn’t seem that you and all your competitors probably have the capacity to meet that. So, how do you envision that those kind of events playing out once they want to start those projects, and what kind of conversation is going on about the supply between you, your competitors, and those at least two hospitals?

Jim Boldt

Well. I think everybody has told hospitals they’re dealing with that they’d be much better off to take some newly trained people. As we’ve talked about before the CIOs just aren’t ready to do that, so they are insisting, they want to see the resumes of experienced people.

Right now, we have far more RECs than we can deliver on, I mean which we could deliver on all the open RECs that we have. More in the process of getting more recruiters in the healthcare area to try and deal with the number of RECs we have now and once those two systems come on live, if we win both of them, it’s just going to make the problem even worse, and we’re just trying, kind of steal as many people from our competitors as we possibly can.

Brian Kinstlinger – Sidoti

And so, in – are you constrained from bidding on certain projects this point, are you cashing on a few, and then when you do start a new project, that consultant, that goes off an old project presumably and starts the new one, how much higher is the bill rate you expect in 2013, versus what they were previously billing, as a percentage?

Jim Boldt

Well, that’s okay. I’ll answer the second question first. Last couple years we’ve seen bill rates go up 5% to 10%, and I suspect that’s what’ll happen this year as well. If the shortage becomes acute, the number of – the percentage will obviously go up incredibly.

When we bid on a project, there is – it’s easily assumed that the IT services firms will probably provide about a third of the people needed and the hospital will provide two-thirds. What usually happens is we’ll come up with enough people to start the project – so our third, and then the hospital can pick all the people they thought of from their clinics, and their IT, so we get additional RECs.

We’re committed to provide the people’s that are one-third and we always say that we’ve been able to come up with those people. The additional RECs, that we have are the other two-thirds that we didn’t actually commit to while assigning.

For these larger projects nobody can supply them with the people alone, there isn’t any vendor out there that can take this one hospital system with 5,000 people for instance, and provide all the staff what they’re going to need. So, we actually don’t have to sign up, for people we just get us supply as many people as we possibly can.

Brian Kinstlinger – Sidoti

Great. Last question I have – I’ve bunch more, I’ll get back in the queue though, and let some others take a stab at it. Healthcare revenue growth has slowed in each of the last three quarters, and I guess I’m just trying to understand either reasoning for that. When you expect it all hit the 20% range you’re talking about, and take us through the scenario of that outsourcing contract in the third quarter that stalled, given they were changing systems, did that impact fourth quarter as well?

Jim Boldt

No. I’m not sure, which healthcare system that you’re talking...

Brian Kinstlinger – Sidoti

This is an outsourcing contract hit in the third quarter, they were transitioned to a new system, and so you guys were rolled off temporarily, and you said would probably be rolled back on...?

Jim Boldt

Right. We did – it actually was a different system that was kind of replacing that. It did startup not as quickly as we thought. It’s actually going quite well now, and it’s probably going to be through the second quarter that we’re bringing in the staff up that additional outsourcing engagement.

What’s really happening to us is we’re being impacted by the shortage of people. It’s not – the constraint is not the number of opportunities. We literally, probably could grow our healthcare business – if we could fill all the RECs right now, probably by about 50% maybe. If we could fill the RECs, we just did in house, but we just can’t find the number of people, and that’s really been the constraint.

We think by – we’re kind of trying a couple of different things obviously. But, by focusing in on outsourcing, in addition to the EMR, those people are much easier to find and that’s going to help drive our healthcare business, and get us up to the 20% mark in 2013. One change that’s kind of happened within the last six months or so, our clients used to say, okay, I’m going to engage you for the implementations – the, well, I’ll say it’s an Epic or a Cerner implementation.

And when you get done, my people are going to takeover, and will maintain the systems, and do the helpdesk, and everything else they have to do the keep the systems going, we’re now just starting to see customers, say, okay, maybe you should do the outsourcing of those implications going forward. So, a lot of our business in the past has been legacy outsourcing, where you see the newly implemented EMR as an opportunity going forward, which we haven’t had in the past.

Brian Kinstlinger – Sidoti

Great. Thanks so much. I will get back in queue.

Jim Boldt

Thank you.

Operator

And, we do have a question from the line of Bill Sutherland with Northland, I’m sorry Northland Capital Market. Please go ahead.

Jim Boldt

Good morning, Bill.

Bill Sutherland – Northland Capital Market

Hey, Jim. Just real quickly on RFP status as you stand today or I guess you said you want of seven outstanding in Q4?

Jim Boldt

We won three, we lost one, one of the, this happens the case only, they pull the RFP for one and we have two. They were waiting to hear whether we were selected or not.

Bill Sutherland – Northland Capital Market

And you have received another one or two according today?

Jim Boldt

No, no. No, that’s the count through today.

Bill Sutherland – Northland Capital Market

Okay. So that RFP with 5000 beds is one of the two outstanding?

Jim Boldt

That’s correct. When I say we’re waiting, and that particular RFP came in relatively recently, we counted is as one of the RFPs that we received. We haven’t actually responded to it.

Bill Sutherland – Northland Capital Market

Okay. And then, the tax system that you expect the RFP in Q2?

Jim Boldt

Yes. That’s, they are going to have to start, they are doing plenty now because of such a large system, it’s going to take 90 days to 120 days to finish planning, and then, we’d expect them to put out RFPs, and start to hire people.

Bill Sutherland – Northland Capital Market

Where of the – actually the 10 projects right, will stand as far as the RFPs or how other things go?

Jim Boldt

Yeah. We don’t have any current RFP’s in-house, the fact that the government extended the date again is causing a lot of hospitals to wait and see, the American Medical Association has come out and said they want CMS to extend the date forever, that they want the government to agree that the U.S. will never off of ICD-9, and I don’t – we don’t think that’s practical, but that’s what they’re pushing for. I think they’re probably negotiating trying to get the date extended again. So, some hospitals are doing a little bit internally, a lot of hospitals were kind of sitting on the sidelines, seeing if the AMA is successful again in getting the date pushed.

Bill Sutherland – Northland Capital Market

Okay. And, could you give us a little color on the Margin Index. I was thinking with the impact, we’ve seen a slight impact with software in particular, and then just Healthcare Solutions, the gross margins would be the part of the their effort and even, and they’re up a little, but, it seems like it’s mostly coming G&A, I’m just curious about that, and what you think going forward?

Jim Boldt

Well. We do some, but not as much maybe as you’re anticipating of the newer SaaS types offerings in our estimate for the year. Clearly, as the newer SaaS offerings kick-in, the increase is going to show on our direct profit margin. I don’t – in the last of years, we’ve been successful in holding our revenue, our SG&A expense down, given the revenue growth, and I think, we’ll see a continuation of that to some extent, because our corporate office expense doesn’t grow as fast as our revenues, for instance, but a lot of our fixed costs are. But, clearly long-term to meet our profit top objective, it’s going to be the direct profit line that you you’ll see the increase in.

Brendan Harrington

That’s what I was thinking, just given the mix – the shift and the mix of business, I was just surprised we have a little bit more in 2012 as well. What are the days in the quarters in 2013?

Jim Boldt

Okay. The first quarter has 63 days, the second quarter 64, the third 63, and the fourth 65. So, there is 255 billing days in 2013 same as the last couple of years. The first quarter though loses one day, there were 64 in 2012, there is 63 in 2013. The fourth quarter picks a day up, there were 64 days in 2012, and there are 65 days in 2013.

Bill Sutherland – Northland Capital Market

And, I will get back in queue as well, I have a few more. Thanks Jim.

Jim Boldt

Okay. Thanks Bill.

Operator

We do have a question from the line of Vincent Colicchio from Noble Financial. Please go ahead.

Vincent Colicchio – Noble Financial

Yeah. Hi, guys. This is Vince from Noble. Jim, what were some of the key factors driving the European strategy. I mean that was quite strong a 15% in local currency?

Jim Boldt

Right. Well, there is two things really driving the results, one we’re in the Flemish portion of Belgium that’s where they are locating the new European headquarters for the European Union. And we are one of the largest, we have over a 500 people in that office, we’re one of the largest IT services companies there. So more and more we’re selling Solutions actually into the new European Union they are kind of like, they are building Washington DC 200 years later every month or two they will open a new ministry, and they need IT support. The other thing that’s been very favorable in Europe has been our testing practice, we have somewhat of a unique automated testing practice, and that business also has been growing.

Vincent Colicchio – Noble Financial

And do you expect Europe to continue to be strong in 2013?

Jim Boldt

Yes, actually we do. Those two factors are going to continue. And then at some point, we think they’ll start to land some of the hospital business. We’re very optimistic of buying – about buying the etrinity. The etrinity people actually have EMR experience, using local packages that aren’t as robust as the ones from the United States, but when you marry those people with some of our U.S. expertise, we think they will be very successful in selling to the hospitals in Europe.

Just to that point, I mean it’s kind of surprised me there is a large show in the United States, it’s called HIMSS, it’s Health Information Management System Solutions, I think, or Society. And everybody goes to HIMSS, probably almost everyone of the CIO’s that we deal with from a large hospital system will be there. No one ever comes over from Europe. This year, there are 16 hospitals just in Belgium sending 35 people to HIMSS to look at software. So, in the Netherlands and Belgium particularly, they’re really starting to seriously take a look at the U.S. software. And that was one of the reasons that we bought Etrinity, when we did we want to be in the process of them – helping them to select the software that they’re going to use and then hopefully getting the implementation after that.

Vincent Colicchio – Noble Financial

We’re starting to hear in the press more and more about the Healthcare Information Exchanges, any movement on that side of the things?

Jim Boldt

We still have customers how – we’re doing HIE work, some of them have actually begun to bring up communitywide EMR systems. The problem is that they don’t have steady funding sources. New York State for a while was funding on a lot and one grant they gave the HIEs in New York State, the 11 HIEs that they appoint $100 million to start up their HIE projects, but they need a more sustainable revenue source in order for them to really start up and do what they need to do.

There’s still about $18 billion left in the stimulus package, we are spending, and they can be spent at the total discretion of the secretary of HHS. So what we expect ultimately is they’re going to – the federal government will take some of their money, and release it to the states to give to their HIE’s, and that’ll be the stimulus to get the HIE’s going until you have a lot of the hospitals in an area though that have their EMR systems up and running, it’s not worthy to give the money to the HIEs because there are no records to start to share.

Vincent Colicchio – Noble Financial

Could you help us directionally, with the segments for the 1Q. I assume Staffing will be lower, will Solutions be higher sequentially?

Jim Boldt

Yeah. We expect, that we are in the first quarter, both the Solutions and Staffing lose about 2% of their revenue growth just because there’s one less day to bill, and that day as I said before kind of accrues to the fourth quarter this year. So the Staffing business will probably will be flattish, and the Solutions business will continue to see some growth there.

Vincent Colicchio – Noble Financial

One last question, I missed what you said about the contribution of growth in the quarter?

Brendan Harrington

It was $0.02 again per share when compared to the fourth quarter 2011.

Vincent Colicchio – Noble Financial

Okay, thanks. I’ll go back in the queue.

Brendan Harrington

Okay.

Operator

And we do have a question from the line of Kevin Liu with B. Riley. Please go ahead.

Kevin Liu – B. Riley

Hi. Good morning guys. Hey Jim, regarding the RFPs that you guys won on the EMR side. Can you just talk about how those compare with projects that are starting to roll off in terms of size and scope?

Jim Boldt

They are more our average size or above, so they’re actually – the projects that are rolling off were started a couple of years ago, so they’re smaller, these are larger. We didn’t start any of the projects though until the first quarter of the year, so – and actually a lot of them are starting up in March. So that the – they’ll start to build staff in March, but there won’t be – the staff increase won’t be completed actually until the second quarter.

Kevin Liu – B. Riley

Got it. And what sort of contribution have you assumed from the acquisition of etrinity both in the Q1 and fiscal 2013 results?

Jim Boldt

Well, etrinity will be probably close to $3 million to our revenue in U.S. dollars in 2013. It’s going to flat to very slightly accretive, so flat to $0.01 in terms of earnings this year.

Kevin Liu – B. Riley

All right. And, in terms of kind of the regional focus, you’ve talked about some opportunities as U.S. software gets adopted over there. Are there plans to expand beyond kind of the current regional focus, and maybe just talk about how other opportunities for you to grow either organically or inorganically within the European marketplace on the healthcare side?

Jim Boldt

Good question. Actually, etrinity does business currently not only in Belgium, but also the Netherlands. I think there are 43 hospitals in the Netherlands that have more than 500 beds. I’m not sure of the count in Belgium, but I think it’s probably 15 to 20 additional hospitals. Those hospitals seem to be farther ahead than those, and the ones in the UK are farther ahead it seems in looking at the U.S. software.

Part of the reason for that we suspect is that, Epic who has been the big winner in the United States on EMRs opened an office in Amsterdam in November a year ago. So, they actually did an install, two installs of hospitals Epic did themselves in the Netherlands, and the first hospital that’s up and running is reporting significant cost reductions because of the U.S. software. So, I think that’s why probably the Netherlands and Belgium are kind of moving quicker than some of the other countries.

Same with the UK, because of the National Health System project, those hospitals are much more familiar with the U.S. software. Now the NHS has released its central controls, so the – the project itself is dead, but they transferred capital expenditures back to the individual hospitals and trust, and they are starting to look at putting U.S. software in. So we think that probably Belgium, the Netherlands and the UK are going to be the first adapters of the U.S. software.

Beyond that, we’re going to have to get into – how do we get into the other countries, obviously there are language differences if you can’t just walk into France and speak Flemish or English, fortunately a good part of our Belgium people also speak French. So, that actually is a help in terms of France. We may ultimately want to buy something small in some of those countries, we haven’t really work that out yet, we want to get our feet on the ground first in Belgium, Netherlands and the UK.

Kevin Liu – B. Riley

Okay. And on the two healthcare IT products I guess for both the fraud, waste and abuse as well as the IT medical management model, while I’m sure you probably won’t provide specific revenue guidance. Maybe if you could talk about the number of commercial deployments you’re in today, and how you expect that to expand over the course of the year?

Jim Boldt

Right, the – actually it’s one for each where in one IT medical management engagement and we have one contract with a payer that’s above paid I think we’re actually beginning to market the IT medical management model to some institutions, hospitals et cetera, that are looking for better ways to treat patients and it’s possible we could have another engagement there before the end of the year, it’s a longer sales cycle, because what you’re really doing is changing the way that physicians treat patients and it’s a lot harder to get them to change than it is to sell I think fraud, waste and abuse.

Fraud, waste and abuse we only have one, but we at least have six datas where people are actually up giving us data, and we are running the application, and telling them how much money they save. So I suspect that we’ll probably land more fraud, waste and abuse this year then we will IT medical and management models.

And if you look at, what I think it as the shorter term, which would be the one to three year period, I suspect that fraud, waste and abuse will do better. Personalized medicine is coming, the ACOs are going to come, they are going to look to things like the IT, Medical, Management model in genomic testing in order to help reduce cost. So longer term I suspect the personalized medicine offering will probably produce more revenue and profit, but I think that they’ll start up slower than fraud, waste and abuse.

Kevin Liu – B. Riley

Got it. Thank you.

Jim Boldt

Okay, thanks.

Operator

And we do have a question from the line of Frank DiLorenzo with Singular Research. Please go ahead.

Jim Boldt

Good morning, Frank.

Frank DiLorenzo – Singular Research

Good morning, thanks for taking my call. I had a few questions, one with regards to guidance. Is it safe to assume that guidance doesn’t include any potential movement on the ICD-10 front in 2013.

Jim Boldt

There’s probably a little, there is some revenue in there I suspect, for instance we have one project with a payer that’s ongoing, their revenue for sure is in there. We actually take all of our opportunities, this is done at the salesmen and sales manager level, and we factor how much revenue based upon probabilities, that we’re going to get this year. So I suspect there is a little bit beyond the project that we’re already working at.

Frank DiLorenzo – Singular Research

But nothing above and beyond that at this point?

Jim Boldt

I doubt it.

Frank DiLorenzo – Singular Research

And with regards to Staffing, for 2012, you grew approximately 0.7%, can you give us a little more details going into 2013? Is that a reference point? Can you grow with that level? Will it be a little lower, and maybe above the 1% level, do you have a range or is that too hard to predict at this point in time?

Jim Boldt

No, we put into our estimate for the year that we’d grow our Staffing business by 2% in 2013 over what we had in 2012. If you look at the national estimates that are out there at Gardner et cetera, I think that they’re probably predicting about or not probably – but I looked at January’s projection, and they’re predicting about a 3% increase in Staffing in the U.S. in 2013, IT staffing in 2013.

A good part of our business, 35%. 40% is tied to the server industry. And the server industry has not been robust for any other players. If you look at IBM, HP, Dell’s results for last year, it’s just not been a good place to be. So we think that our Staffing business because we’re so concentrated in the server business will grow slightly less than the national trend in 2013.

Frank DiLorenzo – Singular Research

Okay, thanks. One other thing with regards to genomics initiatives, is there any long-term potential to branch out in this area maybe in other parts of the country?

Jim Boldt

Yes. We’ve actually started to talk to other hospitals in other parts of the country. We’re doing – not only tying in EMRs, which is important, but we’re also doing a lot of data analytics on the genomic sequencing. So, we think that’s a viable offering going forward.

Frank DiLorenzo – Singular Research

Okay. Thanks.

Operator

And, we do have a question from the line of Rick D’Auteuil with Columbia Management. Please go ahead.

Jim Boldt

Good morning, Rick.

Rick D’Auteuil – Columbia Management

Good morning. A lot of my questions have been answered, but just to fill out on the SaaS, I think you’re still expecting that be up year-over-year, overall it contributed $0.4 last year, is it twice that this year in your thoughts or...

Brendan Harrington

Well. That’s actually about right at the midpoint, I think it depends on where you are in our earnings estimate, the low end or the high end. I think, we’re thinking that it would probably be between $0.05 and $0.10 in earnings per share in 2013, and last year it was $0.04.

Rick D’Auteuil – Columbia Management

Okay. The one we haven’t talked about is that just slow to develop or is, the third one that you don’t have any active commercial assignments on?

Brendan Harrington

Yeah. The third one is, it’s been limited really by legislations, what the third did, it was an IT, it was an application that did better actuarial estimates and groups less than 50 people, and every actuary that we showed it to, every actuarial department including some of the biggest insurance companies in the United States that it was, we started working on it in 2006, we actually finished it in 2009, so we started a demo, got everybody excited and ObamaCare came along and one of the provisions in ObamaCare is that for groups less than 50, you cannot charge – the people you charge the most to more than three or four times that the amount you charge are the least four.

So, it significantly narrows the actuarial range that’s allowed and they are already above the three to four times in many of the accounts that they’re underwriting, so they’re going to have to change that in 2014 when the law kicks in. So, we have had an insurance company use it for a couple of years, but going forward unless the law has changed, you’re just not going to able to use it because of the legislations prohibit.

Rick D’Auteuil – Columbia Management

Okay. The healthcare pricing you said was up 5% to 10% last year?

Jim Boldt

Yes.

Rick D’Auteuil – Columbia Management

What’s the expectation for this year?

Jim Boldt

Probably about the same, 5% to 10% unless there is – there is critical shortage that pushes it up more, but right now 5% to 10%.

Rick D’Auteuil – Columbia Management

And the capture rate, so the billing is going up 5% to 10% and the pay rate is going up 5% to 10%?

Jim Boldt

Yes. That’s correct.

Rick D’Auteuil – Columbia Management

So, you’re gaining a margin on that in general, right?

Jim Boldt

Yes.

Rick D’Auteuil – Columbia Management

Okay. I’m scratching my head a little bit on this ICD-10 that I think Bill Sutherland asked, what is the current deadline, is it October 2014?

Jim Boldt

2014.

Rick D’Auteuil – Columbia Management

Okay. That is still, but – I mean I know that changed, but that it didn’t change again from that at this point?

Jim Boldt

No, but that’s the third time CMS has postponed it, that’s why I think hospitals are optimistic, but they’re going to postpone it again. I don’t think that they are, but it’s really a political decision.

Rick D’Auteuil – Columbia Management

But you’ve talked in the past about how complicated it potentially is to upgrade to ICD-10, and it could be very significant contract for you to do the work that’s necessary.

Jim Boldt

Yes.

Rick D’Auteuil – Columbia Management

To upgrade to that and many of those assignments are likely to be a year or two and we’re already inside the two-year window to meet the new deadline, and at some point doesn’t somebody, I would think you can’t extend it forever. You talked about the AMA, the American Medical Association saying that logistic with ICD-9 forever. But I thought that the issues around that where the constraints around, the number of applicable procedures that you could build under that, its limited right?

Jim Boldt

Yes, it is, and we are also limited in what diseases we can follow. But everything you said is correct, and I don’t know why, but many of those CIOs and CEOs of hospitals that I have talked to think that they can do it in a year, and that maybe wishful thinking, maybe not. Some of them have kind of taken the approach of saying, we can map actually from ICD-9 codes into our ICD-10.

The problem when you do that is that you don’t have the document case, documentation to support a higher reimbursement. So if you did a procedure, all that you can do is map to the lowest cost procedure, right. There might be 10 them at an instant, there’s 80. We got to map to the lowest cost, that’s all you can only do is say, we put a stent in, we got to pick the lowest cost, and in models people have run a hospital will lose 3% to 5% of their revenues, if they are mapping like that, but it means that there is a solution where the hospital doesn’t go away.

So, I think a lot of the hospitals have said, look it’s only going to take me a year to do it, this is the third time that the AMA has been successful I mean they got it, it was originally 2010, then it went 2011, then it went to 2000, I’m sorry if I skip the 2013 and now it’s 2014. So they have been successful in getting extended at least three times, I think that they think that there may be a four. And they have other needs, most hospitals they got EMR, they got it get ready for accountable care, the governments put a lot of work on hospitals.

Rick D’Auteuil – Columbia Management

Okay, I got to think in the next six months there is a window, somebody is going to call a bluff there, right?

Jim Boldt

One would hope so.

Rick D’Auteuil – Columbia Management

That does – does its CMS that’s the policing agency or?

Jim Boldt

Yes CMS controls both Medicare and Medicaid effectively. So that’s 50% may be a healthcare in the United States. So the day-to-day pick the payers and everybody have to switch.

Rick D’Auteuil – Columbia Management

I mean, at some point CMS has got to see that nobody is doing it, right?

Jim Boldt

Right, well some of the most of payers hit a bigger problem and a lot of them are working on their projects, it’s really been the hospitals that have been digging their heels and then waiting.

Rick D’Auteuil – Columbia Management

Okay. Okay. Okay. I appreciate the answers, thank you.

Jim Boldt

Yeah.

Operator

And we do have a question from the line of Frank Sparacino with First Analysis. Please go ahead.

Jim Boldt

Good morning Frank.

Frank Sparacino – First Analysis

Hi guys. I wanted to go back on the EMR work, I’m just curious chime the type of work that you’re doing in 2013, is it still stage I related have you started some stage II projects and then I would also be curious on what you are seeing from a replacement standpoint given a lot of folks have talked about a pretty vibrant replacement market on the EMR side?

Jim Boldt

All good questions. We still are doing initial implementations and that’s still the bulk of our business. I suspect, we’re going to start to get some meaningful use too. We have some of it now, but it’s not a big part. We’re not counting it, we only count the significant implementations actually in the count that we give out for the number of projects we’re working on.

We’re also seeing hospitals who elected to put it in kind of (inaudible) and have the software manufacturer do the implementation, kind of one-way, you got to change the way of practice medicine to the – to a software they’re starting to switch over. We have seen some of the hospital systems that actually – well, the one that we’ve talked about, the very large one the one we’re waiting for had put in a hospital system years ago they have been getting meaningful years reimbursement forward but they are looking to switch over to Epic because Epic is so much more robust.

There is also some concerns out there, I don’t know if this is true or not, but the big guys on this space, so Epic, Cerner, and Siemens will make everybody believe they are going to make their dates, so that they have them meaningfully used to, available on time. But some of the other once, there is a concern that the because of the design of the systems, it’s going to be very difficult for them to do it. So you got some people look and say hey, maybe I should switch because I’m never going to get to a level 2.

Frank Sparacino – First Analysis

Good, that’s helpful. And, then, on the international side, I’d be curious, I mean, there have been a number of software vendors that have failed, I mean even Cerner has reports of failed implementations. Primarily you can, I’m not sure about the rest of Europe, but and then a lot of the healthcare IT consulting firms have had some serious issues over there. So I’m just curious what your thoughts are on the international side when you look at those risks, is it primarily Epic work you’re going to be seeing internationally, but just some thoughts around that actually?

Jim Boldt

Well. I suspect it’s going to be Epic and Cerner and probably most of our EMR work at the moment is Epic actually because they’ve been just winning huge market share in the United States. We actually – we supported Fujitsu in the southern region. We put two Cerner packages in the two hospitals in the southern region and they were up and running fine last time when we checked, so it’s definitely is doable. Epic has translated their package into at least all the major languages, so they can do Dutch, French, German et cetera. So the language part of its been done.

A lot of the – believe me, at one point, when we won a prime we get paid, which was the nice part. We’re very involved in all the NHS discussions et cetera. And a lot of problem really was the position that the NHS was taking. The NHS basically, when we put in an initial version of Cerner, said that it didn’t meet all the requirements – got a list of requirements, Cerner changed the application. They then looked at the system and said it doesn’t do all the stuff that we would like, which was never in their initial requirements. And that the expectations I think at the NHS and some political factors, there was a lot of contention because they had taken the capital expenditures away from the individual hospitals and trusts and centralized it for the first time ever and of course the individual hospital staff didn’t like that.

It had a lot to do I think with what ultimately happened. Now, you’ve got the individual hospitals saying, yes I would like this. The software itself, Epic or Cerner is very configurable, that’s really what we do. We go in and say, okay, you’re the radiology department, this is your work flow. We can get it a 95% to 99% close to your workflow. I – we really think that long-term, the European hospitals are just going to be much better off, if they use the U.S. software, because we’ve not seen anything at all in the European market that could stand up against an Epic or a Cerner.

Frank Sparacino – First Analysis

Thank you.

Jim Boldt

Okay.

Operator

And we do have a question from – follow-up question from the line of Brian Kinstlinger with Sidoti. Please go ahead.

Brian Kinstlinger – Sidoti

Hi. Two quick..

Jim Boldt

Good morning.

Brian Kinstlinger – Sidoti

How are you. Two quick ones. The first one is do you have any project in the first half of the year that you expect to go live, and if so, how many?

Jim Boldt

That we expect to go live. The three projects that we just won, that we reported will all go live in the first...

Brian Kinstlinger – Sidoti

I’m sorry, I mean, off the 17 that will expire – will end – will be completed?

Jim Boldt

We don’t have a good system of figuring that out. I mean, we can figure out when the day will come, but often the hospital engages to do optimization. The other trend that’s started is we will think that we’re coming to an end of our project in the hospital by other hospitals, smaller hospitals, often a bunch. And, our people just move over to the other to the other new projects. So, we – if you think about it, there are two-year projects so in any year theoretically, we should and off those 18 projects, we should have nine that finish, it doesn’t always happen that way.

Brian Kinstlinger – Sidoti

And in the one that expired, did you start to announce sourcing contract for them? You said that traditionally or not traditionally, you’re saying now that your EMR at yearend, you are trying to get the outsourcing work. Do that actually occur with your customer that rolled off?

Jim Boldt

It did not occur with that customer, it was actually a different customer that where we’re still working on implementing some of their hospitals that they have hospitals up and the new system and they have some of the hospitals we’re still implementing in.

Brian Kinstlinger – Sidoti

Okay. And then finally on the European hospital side. Do you expect to face the same supply constraints or do you think that would be different and if so why?

Jim Boldt

Yeah, ironically no. When we did the work in England, there weren’t people who knew the U.S. software. So half of the people we brought over from the United States that had done a couple of implementations in whatever package we’re putting in. And then half of the people we hired locally and trained and the hospitals accepted them e because that was the only choice they had.

Brian Kinstlinger – Sidoti

Right. Thank you so much.

Operator

(Operator Instructions) At this time, it does appear there are no further questions from the phone lines. Please continue.

Jim Boldt

Thank you. We expect another year of double-digit earnings growth for CTG, our seventh out of the last eight years. CTG is firmly established in healthcare, one of the fastest growing major U.S. industries. We have offerings for Electronic Medical Records, ICD-10 conversions, accountable care organizations, genomic sequencing, fraud, waste and abuse, and IT management models for chronic diseases, all of which were expected to be in strong demand for several years as such remain very excited about CTG’s future growth prospects.

I would like to thank you for your continued support for joining us this morning. Have a great day.

Operator

And ladies and gentlemen, this conference will be available for replay after 11:30 AM today, the 19th February through midnight on the 26th of February 2013. You may access the AT&T Teleconference replay at any time by dialing 1-800-475-6701, entering the access code 269072. International participants may dial 320-365-3844. And again those numbers are 1-800-475-6701 and 320-365-3844. Again entering the access code 269072. That does include your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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