Mastech Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.24.13 | About: Mastech Holdings, (MHH)

Mastech Holdings, Inc. (NYSEMKT:MHH)

Q1 2013 Earnings Call

April 24, 2013 9:00 AM ET

Executives

Jenny Lacey – Manager, Legal Affairs and Compliance Officer

Jack Cronin – CFO, VP-Finance and Administration

Kevin Horner – President and CEO

Analysts

David Polonitza – AB Value Management

Operator

Greetings, and welcome to the Mastech Holdings, Inc. first quarter 2013 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jenny Lacey, Manager of Legal Affairs from Mastech Holdings, Inc. Thank you.

Ms. Lacey, you may begin.

Jenny Lacey

Thank you, operator. And welcome to Mastech’s first quarter 2013 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastech.com.

With me on the call today are Kevin Horner, Mastech’s Chief Executive Officer, and Jack Cronin, our Chief Financial Officer.

I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections, as well as statements about our plans, strategies, contentions, and beliefs concerning our business, cash flows, costs, and the markets in which we operate.

Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change.

There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the Company’s 2012 annual report on Form 10-K filed with the Securities and Exchange Commission and available on their website, at www.sec.gov.

As a reminder, we will not be providing guidance during this call nor will we provide guidance in any subsequent one-on-one meetings or calls.

I will now turn the call over to Jack for a review of our first quarter 2013 results.

Jack Cronin

Thanks, Jenny, and good morning, everyone. Revenues for the first quarter of 2013 totaled $27 million or approximately 10% higher than first quarter 2012 revenues and represented a 2% improvement over the fourth quarter of 2012. This should be noted that the 2013 quarter had one less billable day than last year’s corresponding period.

Our IT operations continue to see solid activity levels during much of the quarter and market conditions in our healthcare operations remain positive overall despite seasonal weakness in our surgical nursing business.

Gross profits for the first quarter of 2013 totaled $4.9 million or 18.1% of revenues compared to $4.5 million or 18.2% of revenues during the same period last year. Our gross profit expansion reflects an increase in billable consultants on assignment in the first quarter of 2013 compared to corresponding 2012 period. The slight gross margin decline was largely due to higher bench cost and front-end project initiation cost related to increases in our travel nurse business.

SG&A expenses were $3.9 million in the first quarter of 2013, which were slightly higher than last year’s level. SG&A expenses represent a 14.6% of total revenues in the first quarter of 2013 compared to 15.8% of revenues in the corresponding quarter of 2012. Much of our operating expense increase during the quarter was due to adding productive capacity to both ourselves and recruitment organizations.

Net income for the first quarter of 2013 was $575,000 or $0.17 per diluted share compared to $352,000 or $0.10 per diluted share for the first quarter of 2012.

Addressing our financial position, at March 31st, 2013, we had outstanding borrowings net of cash balances on hand of $2 million. This position is largely unchanged from yearend 2012 despite an investment in operating working capital of $714,000 during the quarter to support revenue growth. Additionally, borrowing capacity under our credit facility increased by about $700,000 during the quarter to close at $13.2 million as of March 31st, 2013.

I’ll now turn the call over to Kevin for his comments.

Kevin Horner

Thank you, Jack, and good morning all. I’m pleased to report another quarter of year-over-year top-line and bottom-line growth at Mastech. As you know, Q1 is historically a challenging quarter for our industry. Even so at Mastech, we were able to grow.

In addition to the financial growth already discussed, we grew our IT billable consultant base during the quarter by more than 4%. This increase in consultants on billing is our best first quarter performance since 2004.

In our healthcare segment, we grew revenues for the 11th consecutive quarter despite seasonal headwinds in our surgical nursing business. Operationally, we continue to see steady incremental improvements in our recruitment organization, and Scott Aicher, our new IT Business COO, is positively impacting how our sale and recruiting organizations are approaching opportunities.

As Jack mentioned already, Q1 had one less billable day and we did add staff to both our sales and recruiting organizations during the quarter. You will clearly see those growth investments in our first quarter financials.

My center of gravity is simple here. It’s hard not to like double-digit top-line revenue growth and a 70% increase in bottom-line earnings per share, particularly when it appears the market is growing at a much slower rate. I’d like to offer well-done to the team at Mastech and a thank you to our clients.

While we continue to add some areas for improvement to address in the business, the fact is I can unequivocally tell you that I like what I’ve been seeing from our employees throughout the entire organization. As a company, we are performing at a much higher energy level than I’ve seen before and our organizational confidence has significantly improved as well.

I’m an old baseball guy. In baseball, they say hitting is contagious. I would tell you, placing somebody in a new job drives that same level of contagiousness and everyone on the Mastech wants to get that hit every day.

It’s been very satisfying for me personally to see this transformation, and I do believe that this ambitious upbeat attitude shows up every day in the quality and consistency of our results.

Once again, thanks for the Mastech team for a great quarter, and at this time, I would open it up for your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator instructions)

Kevin Horner

Are there any questions?

Operator

Yes, we do have one question from David Polonitza with AB Value Management. Please proceed with your question.

David Polonitza – AB Value Management

Good morning, Jack and Kevin. Thanks again for hosting this call here. Just a few questions today on what you guys said in the press release.

Could you explain a little bit more the dynamics of kind of the first quarter for your business in the industry? Because there was a similar gross margin that was recorded last year at this time and then the rest –

Kevin Horner

Melissa?

Operator

Yes, gentlemen?

Jenny Lacey

Melissa, I am hearing you. I believe that Jack and Kevin may be having some technical difficulty.

David Polonitza – AB Value Management

So Jack and Kevin, can you hear me?

Operator

It seems that we’re having some technical problem.

Kevin Horner

Melissa, if you’re on the call, we can’t hear you at my phone.

Operator

One moment, we will re-establish our line with the speakers.

Now rejoining our speakers’ line.

Kevin Horner

Hello?

David Polonitza – AB Value Management

Yes, Kevin, can you hear me? This is Dave Polonitza.

Kevin Horner

Dave, I can though. I apologize. Not quite sure what happened with the technology.

David Polonitza – AB Value Management

No problem. Just a few questions for you guys if everything is good here in the IT side, if you could just explain the dynamics of the first quarter for Mastech and the industry in general because it seems like last year at this time, the margin was comparable but the rest of the year, you had about 100-basis point increase on gross margins.

Kevin Horner

Yes. So I’ll try to take a shot at that and then Jack if you wouldn’t mind there’s probably some additional stuff that I missed. So let’s talk first off about the industry and we’ve had a couple of public staffing companies in our space report already.

So CTG reported Monday, half reported yesterday. CTG reported year-over-year growth of 5% and that was for the total of their IT business staffing and solutions. The RHI Technology Unit reported last night a 4.6% year-over-year top-line growth. And so that’s a bit of – I mean, obviously, two data points doesn’t give you the entire market but clearly, large scalable players, which is why we can talk to market and say at a 10% year-over-year top-line growth and 70% year-over-year bottom line growth. We feel pretty comfortable about how quickly we’re growing relative to our public company peer group. So that’s number one about the industry Dave.

In terms of gross margins, I mean, some of it is just the shift of our business and if you look at where we’re growing. We’re growing into our whole host of our wholesale client base. And that cost us a point or two in gross margin.

Jack, any other –

Jack Cronin

First quarter is generally impacted. That’s why you see the delta between this year and last year isn’t all that great but the absolute number, the 18% versus the 19% is a big swing, and there’s two primary reasons. One is bench cost tends to be a little bit higher in Q1 because we do have a lot of projects that ends late in December. And the other factor is the re-pegging of the payroll taxes particularly the front-end loaded unemployment [inaudible], which tend to hit us in Q1.

David Polonitza – AB Value Management

Another question I had is Kevin if you can comment; you said you see improvement in the recruiting performance metrics, if you can elaborate a bit up on that.

Kevin Horner

Without actually getting into the details of the way we’re measuring recruiter efficiency, we have a gap closure target from where we finish Q4 2012 and what our target for recruiter efficiency is in calendar year 2013. And in the quarter we closed 17% of that gap. Additionally, on de-confirmation rate improvement, we closed that gap by 45%.

So we are well ahead of our de-confirmation rate. Improvements are good. Ideally, I would have like to have been 20% on that recruiter efficiency improvement metric but I’m very pleased with 17% improvement inside of the way we’re driving recruiter efficiency.

David Polonitza – AB Value Management

And you mentioned – I’m sorry.

Kevin Horner

The other piece of data that I would offer is when I look at Q1 2012 versus Q1 2013 from a nuts and bolts activity of the business. So real demand from our customer base in the form of requirements and this is specifically side of the house because we’ve grown the healthcare side of the house very nicely, and the team there has done a nice job particularly on the traveling nurse side of the business.

So let’s talk on the IT side, which is 90% of our business. When I look at customer demand, our customer demand is flat year over year. It’s flat to actually slightly lower and the slightly lower is a choice. We’ve chosen to not work some things in 2013 that we did work in 2012. So that demand is fundamentally flat to slightly down every other measure in our business.

So our talent search and submittal rates are up 8% year over year in the quarter. So our hit rates around that talent getting interviews are up 33% year over year. And close rate and delivery rate is up 19% year over year. And so, Dave, those are some of the measures that we look at in order to assess performance. And they allow me to feel pretty good about the fact that the improvement initiatives that we began in 2012 are taking hold. And process training and leadership are the three critical items around driving those improvements, and we seem to be hitting on all three of those year-over-year.

David Polonitza – AB Value Management

And you mentioned that demand for IT staffing services was solid for much of the quarter. Could you comment at all on the trend throughout the quarter? Did it soften as it went on or was it strengthened or just remained flat?

Kevin Horner

Sure. I would be happy too. The quarter strengthened and so if you look year over year, this quarter strengthened as we move from January through March. If you look sequentially, Q4 2012 versus Q1 2013, we were up sequentially on the demand side. Early January was a bit low but we moved quickly back into ranges where we like through February and March. So I’m pleased on the demand side.

David Polonitza – AB Value Management

Kind of in tandem with that, Jack mentioned the company had a productive capacity during the quarter. Can you go into a little bit on what that meant? Was that more on your offshore side of the house?

Kevin Horner

Actually, it was both. We added sales in the US. So we added some sales folks closer to our customers in the US to expand our business on the commercial and customer front. And then we also added recruiting capability to our recruiting engine in India.

David Polonitza – AB Value Management

In terms of India, what type of percentage increase if you can disclose that?

Kevin Horner

Frankly, Dave, I would tell you I just don’t know. I just haven’t done that map. I’m sorry.

David Polonitza – AB Value Management

Okay, sure. The last question I’m sure you pay close attention, IBM, one of your biggest customers. Any comment on what you saw on your last earnings report if that has any effect, some of their weaknesses on your business with them going forward?

Kevin Horner

I actually thought IBM’s announcement that came kind of the same time they reported earnings around their intention to examine the possibility of selling their x86 server business to Lenovo, much like they did their PC business to Lenovo six or seven years ago, I found that interesting in that one way to read that is IBM is clearly moving the state of their business to be all about that the services side of the house, the software side of the house and high-end, high-margin hardware.

And frankly speaking, I think that speaks well to our side or us from the supply side standpoint as they begin – as they continually focus more and more on their Smarter Planet initiative and on their analytics initiative. I think plays squarely into our capabilities.

So I didn’t read anything negative about their earnings announcement relative to our ability to service them or for their idea of demand. I didn’t see anything there.

David Polonitza – AB Value Management

All right, well, thanks guys for the call. It looks like this quarter’s revenue kind of was the highest since before 2007 and keep up the good work. Appreciate it.

Kevin Horner

Thank you, appreciate it.

Jack Cronin

Thanks.

Operator

Thank you. (Operator instructions). Mr. Horner, there are no further questions at this time. I’d like to turn the floor back over to you for any closing comments.

Kevin Horner

Thank you, Melissa, appreciate it. If there are no further questions, I’d like to thank everyone for joining the call today. We look forward to sharing our second quarter 2013 results with you in late July. And everyone, have a great day. Thanks very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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