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Executives

James Culligan - Director of Investor Relations

James Boldt - Chairman, President and Chief Executive Officer

Brendan Harrington - Senior Vice President and Chief Financial Officer

Analysts

Vincent Colicchio - Noble Financial

Kevin Liu - B. Riley & Company

Rick D'Auteuil - Columbia Management

Bill Sutherland - EGE

Frank Sparacino - First Analysis

Frank DiLorenzo - Singular Research

Computer Task Group, Inc. (CTG) Q2 2013 Earnings Conference Call July 23, 2013 10:00 AM ET

Operator

Welcome to the second quarter 2013 earnings conference call. (Operator Instructions) I'd now like to turn the conference over to our first speaker, Mr. Jim Culligan, Director of Investor Relations for CTG. Please go ahead.

James Culligan

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 second quarter of 2013, 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 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, 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 these precautionary factors.

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

James Boldt

Thanks, Jim, and good morning everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second quarter earnings conference call.

As you saw in our news release, our revenues were flat when compared to last year, as we continue to experience delays in healthcare project starts, as hospitals deal with lower reimbursements caused by sequester cuts and as we experienced a reduction in spending from a significant staffing customer, fortunately our focus on higher margin offerings and expense control, allowed our earnings per share to come in at the midpoint of our guidance; and for the first time since we established our current strategy in 2001, caused our operating margin to be in our long-term targeted ranged of 6% to 7%.

I'm going to talk more about our results and what we see for the third quarter and full year, but first I'm going ask Brendan to start us off with the review of our financial results. Brendan?

Brendan Harrington

Thanks Jim. Good morning everyone. For the second quarter of 2013, CTG's revenue was $107.1 million, an increase of $400,000 compared with the second quarter of 2012. Second quarter 2013 had 64 billing days, the same as the second quarter 2012. Solutions revenue in the second quarter of 2013 totaled $42.3 million, a decrease of $1.7 million or 4% compared to the second quarter 2012, primarily due to delays in project starts on electronic medical record projects.

As a percentage of total revenue, solutions revenue was 40% compared to 41% a year ago. Staffing revenue in the quarter increased $2.1 million or 3.4% to $64.8 million, reflecting higher demand for technical resources from several clients, but offset by reductions in staffing from our largest client.

Second quarter revenue from IBM, our largest customer, was $26.6 million compared with $29 million in the second quarter 2012. As a percent of total revenue, revenue from IBM decreased to 24.9% in the 2013 second quarter compared with 27.2% of total revenue in the 2012 second quarter.

The revenue from IBM in the quarter was negatively impacted by approximately $1.4 million when compared with the second quarter 2012, as a result of IBM's spinoff of its retail business to another large company. Although this change lowered our revenue from IBM, the spinoff did not have a negative impact on CTG's overall revenue, since we've retained the business with this new client.

Revenue from our European operations was $18.6 million, an 11% increase from the $16.8 million recorded in last year's second quarter. The effect of foreign currency fluctuations during the second quarter of 2013 increased consolidated revenue by approximately $300,000. On a local currency basis, our European revenue increased by 9.4% compared with the 2012 second quarter. Excluding the effect of the etrinity acquisition that we closed in February 2013, the European revenues increased by 6% or 4.4% in constant currencies.

Direct costs as a percentage of revenue were 78.8% in the second quarter compared with 78.5% in the second quarter of 2012. SG&A expenses as a percent of revenue decreased to 15.2% from 15.7% in the second quarter of 2012. The billable travel expenses included in the second quarter 2013 revenue and direct costs were $3.1 million. The billable travel expenses for the second quarter 2012 totaled $3.7 million.

Second quarter operating income grew to $6.4 million, an increase of approximately $300,000 or 4.2% year-over-year. Operating margin in the second quarter increased to 6% of revenue, a 20 basis point improvement from last year's 5.8%. The year-over-year increases in operating income and margin were due primarily to the decreases in our lowest margin staffing business and increases in the higher margin business in our sales mix.

Net income in the second quarter was $4.1 million, an increase of $400,000 or 9.6% compared to the second quarter 2012. On a per-diluted share basis, net income was $0.24 for the quarter, an increase of 9% compared to the second quarter of 2012, excluding the $0.025 per share non-operational gain from $423,000 of non-taxable life insurance proceeds that we received in the second quarter 2012.

The tax rate for the 2013 second quarter was 36% compared with 37% in the 2012 second quarter. The lower than normal tax rate for both quarters was primarily the result of federal tax credits recorded in the second quarter 2013 and a non-taxable proceeds from life insurance policies received in the 2012 second quarter.

We expect the tax rate for the full year 2013 to be between 36% and 38% compared to 36.5% for 2012. Excluding the effect of approximately $1.3 million of non-taxable life insurance proceeds received in the second and fourth quarters of 2012, the tax rate for 2012 was 38%. The 2013 second quarter results include equity compensation expense of approximately $0.03 per diluted share net of tax, while the second quarter 2012 included equity compensation expense of $0.02 per diluted share net of tax.

Our headcount at the end of the second quarter was 3,900, a decrease of 100 people or 2.5% compared to the end of the first quarter 2013 and a 100% increase compared to the end of the second quarter of 2012. Of the 3,900 employees at the end of the second quarter 2013, 91% were billable resources.

At the end of the second quarter 2013, we had no debt and $34 million of cash on the balance sheet compared to $23.6 million of cash at the end of the second quarter 2012. Both the second quarter of 2013 and 2012 ended between a U.S. biweekly payroll date. Our days sales outstanding was 64 days at the end of the second quarter 2013 compared with 61 days at the end of the second quarter 2012. The increase in the DSO was due to the timing of cash proceeds received at the end of the comparative quarters.

Our cash provided by operations in the second quarter of 2013 was approximately $4.9 million as compared with approximately $6 million in the second quarter of 2012. In the quarter, we had $1.2 million in capital expenditures and recorded depreciation expense of $660,000.

We repurchased 59,000 shares of CTG common stock during the second quarter of 2013. As of today, our repurchase authorization is for approximately 475,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2013.

Jim?

James Boldt

Thanks Brendan. In aggregate, our solutions business decreased by 4% in the second quarter of 2013 and was 40% of our total revenue. The decline in our solutions business came from our healthcare vertical, where our hospital clients faced with a reduction in income and cash flow due to the sequester cuts to Medicare have been reducing spending.

On our conference call at the end of April, we mentioned that we'd receive three RFPs for electronic medical record projects, which the hospitals have not decided what IT services firms will be awarded those projects. We received one new RFP for an EMR project in the last three months. We won two of those projects and lost one project. One of the projects that we won will not start until the third quarter of 2013. We're still waiting on a decision on one RFP, as to what IT services firms will be chosen for that project.

When we started the second quarter 2013, we had 15 active EMR projects. During the second quarter, four projects started and three projects ended in the quarter. Therefore, at the end of the second quarter of 2013, we had 16 active EMR projects.

We also mentioned on our last several conference calls that one of the systems that we bid on that had not picked an IT services company has approximately 5,000 beds significantly more than our average client. While we still think we're in a good position to get some of their work, the timing of the starting of their project has been delayed. Also, the various significant system that we previously talked about that was originally expected to start in early 2013 continues to be delayed.

On the short-term, we believe that our EMR business growth will be constrained due to hospitals having to deal with the reimbursement cuts that have occurred. Long-term, we still see tremendous opportunity for growth in our EMR business. There are still 1,000 to 2,000 hospital bed systems EMR projects that we're pursuing. In addition, the very large systems EMR projects have to eventually startup. Further, there has been very little work done on small hospitals in the United States.

In order to achieve the kind of savings that the U.S. federal governments projected, the healthcare system is going to have to exchange health records, and that means that the health information exchanges or HIEs will have to built. And finally, we believe the European hospitals will ultimately install U.S. software, and that will likely create EMR work for CTG for another decade, given our recent acquisition in Europe of etrinity.

Given the work that still needs to be done, I think you can see why we remain optimistic for the long-term growth potential for our EMR business. Fortunately for CTG, EMR is not our only healthcare offering, and our acquisition of etrinity and other healthcare offerings continue to have a positive impact on our business. We started two new healthcare outsourcing engagements in the second quarter of 2013.

In the second quarter of 2013, our SaaS offerings increased our revenue by approximately $1 million and our EPS by $0.02 over the second quarter of last year. Most notably, while the previously disclosed contract that we signed with a payer for our fraud, waste, and abuse offering in April of 2013, did not produce any revenue in the second quarter.

We expect, as the year progresses this new engagement will aid to our revenue and profitability. In addition to this engagement, we anticipate closing at least one additional fraud, waste and abuse engagement in 2013.

Based upon the new business, we continue to estimate that our SaaS offerings will contribute $0.15 per share at the midpoint of our guidance in 2013, and $0.11 as a profit from our SaaS offerings will occur in the second half of the 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, declined 1% in the second quarter of 2013 when compared to the second quarter of last year.

Our financial services vertical had another excellent quarter. Most of the revenue gain in financial services came from our European operations. Our energy business revenue also increased when compared to the second quarter 2012.

Turning to our staffing business, its revenue was up 3% when you compare to the second quarter 2013 to the second quarter 2012. The staffing business was negatively impacted by staffing reductions made by a significant customer in the middle of the second quarter.

Looking at the third quarter 2013, we're forecasting total revenue to be in the range of $105 million to $107 million. We're forecasting earnings per share in the third quarter 2013 to be in the range of $0.22 to $0.24 per diluted share.

For the 2013 full year, we now expect a revenue range of $428 million to $436 million or a 2% increase to the midpoint of our guidance over 2012. Based upon our revenue forecast and the anticipated mix of business, we now expect 2013 net income per diluted share to be in the range of $0.93 to $0.99 or a 9% increase from 2012 at the midpoint of our guidance, excluding the gains from life insurance proceeds in 2012.

We thought it would be helpful to briefly share our thinking on how we've set our recent guidance for the year. First, we think our healthcare business will grow by approximately 2% in 2013. For our non-healthcare solutions business, we're projecting a revenue increase of approximately 3%. We're forecasting a 1.5% increase in our staffing business in 2013.

We continue to remain optimistic about CTG's long-term growth potential. We are going through a transitional period. We expect our U.S. healthcare business to continue to grow, particularly when some of the larger hospital systems begin their EMR projects. With the recent acquisition of etrinity, a Benelux health insurance company, we've positioned CTG to participate in the adoption of U.S. packaged software by European hospitals.

We've been working on a number of betas with states and payers over the last year or so for our fraud, waste and abuse applications, and we expect another one of those betas to close before yearend. We're currently building out our IT medical management model for four more severe and chronic diseases. That means by the end of 2013, the IT medical management model will be capable of handling five of the 10 diseases that currently account for approximately 70% of all healthcare cost in the United States.

We're also working with a client to combine genomic sequencing with electronic medical records. This only will be the third time that we know of that this combination has been done. This work will position CTG with one of the first of its kind, cutting-edge offerings in the genomic science field. We think that if you look at how CTG is positioned in healthcare, the world's fastest growing industry, you can see why we continue to be optimistic in our future growth opportunities.

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

(Operator Instructions) We will go to Vincent Colicchio with Noble Financial.

Vincent Colicchio - Noble Financial

So Jim, what portion of healthcare revenue in the quarter came from EMR? And can you talk about the non-EMR healthcare business and characterize the pieces that are on that side, and what the growth outlook is for them?

James Boldt

The EMR revenue in the quarter was about $16.5 million or about 15.4% of total revenue. It was down from last year in the second quarter of the year. Our EMR business had been 17%, so it dropped about 2% versus the year ago. And most of the decline that we saw in our healthcare business was actually in the EMR section of the business.

The other side of the business was relatively flat, when you figure out the dollars. We had two new outsourcing engagements startup and we had some other kind of the ancillary business added, so they kind of offset each other.

Vincent Colicchio - Noble Financial

And on the ICD-10 side, are you working on any projects today?

James Boldt

We continue to have two projects. We have one ICD-10 project, a conversion with a payer and one with a provider.

Vincent Colicchio - Noble Financial

Do you think that you're doing a good job on that side or is it still, despite that you appear to be on track for next year as far as the deadline, because you'd be doing a better job on that side or is it still relatively slow there?

John Boldt

I suspect it's relatively slow. I think that most of our hospital clients were laying-off people in the quarter. And I suspect that they were probably more focused on trying to get their operating margins back where they were, closer to where they were, and also they were protecting the cash. So I'm not sure as many were concerned about wanting an ICD-10 project.

The ICD-10 work, we are trying to get there with our existing customers. However, we're not trying to build a huge ICD-10 presence. It's much like Y2K. I mean if the day really is October 14 that the conversion happens, you're going to see a Y2K type effect on one quarter, that business goes away and we won't have anything and perhaps due for the people that we fired. So we're definitely supporting our current clients, but our sales force really is focused on EMR projects, outsourcing and sales offerings.

Vincent Colicchio - Noble Financial

Back to the EMR for a second. Could you remind us, you used to talk about, I think the year that Cerner expected a peak in terms of license revenue as a gauge for when your peak year could be?

James Boldt

Cerner projected a peak in 2014 for their sales. But you have to appreciate that software companies get to record their revenue on the first day of the project. So we will record our revenue over a couple of years. So we lag them by a couple of years. Cerner has actually come out, I heard in one of their conferences and said that, they expect continued growth in the EMR business, but it's going to be from outside the United States. And like us, I believe that they suspect that Europe particularly will start to buy U.S. software starting in 2014.

Operator

We'll go to Kevin Liu with B. Riley & Company.

Kevin Liu - B. Riley & Company

Could you just talk a little bit about the utilization rates for your healthcare solutions focus at the moment? And are you seeing a loosening up in kind of the supply of labor on that sort of business that might give you some opportunity to hire in front anticipated growth later on?

James Boldt

Our utilization has dropped just slightly from what it was before. We have been holding people as the projects delay, to start in the next projects. So it does have an impact on us. We've seen a dramatic change in the market. It was probably most noticeable in the last 30 days, but definitely in the last 90 days in terms of supply and demand.

90 days ago, there are lots of RECs out there, requirements from hospitals, not to do an entire EMR project, but they needed additional people. When our clients begin to lay people off, obviously they took some of their IT people and rather than laying them off, used those people for the RECs.

We also know that two of our EMR competitors had fairly sizeable lay offs during the second quarter, as they stopped their projects and no project start. So the kind of supply and demand for people has definitely gone back in balance. We know about the lay offs, because we actually were hiring some of the better people to use for our projects.

Kevin Liu - B. Riley & Company

And then, you mentioned the need for HIEs affecting it all time. I mean what sort of opportunities are out there on the HIE side? And anything that you see could start up either later this year or perhaps early next?

James Boldt

Well, it definitely could start up, but it's really a decision by the federal government. The HIEs haven't started up because they don't have funding sources. As you know, many of the states at least are running deficits. They haven't been granted as much money to the hospital systems. The federal government and the RO Legislation put $19 billion for EMRs, $300 million of that was to be spent to set standards. The rest of it could be spent at the discretion of Secretary of HHS.

And they did release about $600,000 to the states a couple of years ago to begin the study there for the HIE. So the federal government still has $18 billion approved in the RO funding that they could release whenever they wanted to. And we think a good part of that's probably going to go to the HIEs, but up to this date they haven't released any directly.

Kevin Liu - B. Riley & Company

And just one last question on the fraud, waste and abuse side. The contribution you expect in the back half of the year, to what extent is that dependent on signing up that last prospect in the pipeline or does all of that business come from the small payer, plus the one existing, one you already had?

James Boldt

Actually there is both an IT medical management SaaS offering and a fraud, waste and abuse payer that we've had for the last four quarters, plus this new one. Part of the increase that we're expecting comes from the payer, we already signed up, but part of the increase is expected from an additional client, that we're yet to sign.

Operator

We'll go to line of Rick D'Auteuil from Columbia Management.

Rick D'Auteuil - Columbia Management

Just if you can break down the decline or the adjustment in revenue between the two items that you cite for the shortfall, the IBM's impact and then the healthcare delay impact. I think we're looking at $23 million, how would you split that?

James Boldt

The cut back from the staffing customer happened in the middle of May, so that's really six-and-a-half months or so. That's probably about $9 million and the rest comes from healthcare.

Rick D'Auteuil - Columbia Management

From the Healthcare?

James Boldt

Yes, that's correct. From the lack of growth we're expecting really in healthcare.

Rick D'Auteuil - Columbia Management

So remind me of the any critical deadlines that that the hospitals are trying to meet on the EMR and whether as it relates to being able to avoid penalties? And then share your thoughts on whether it's sort of penny wise and pound foolish by implying these delays?

James Boldt

Under the HITECH Act, the incentives for hospitals to put in EMRs go away in September of 2014 and then in October 2014, if they can't prove a meaningful use, and that's Stage 3 meaningful use, which no one even knows what's required under that. Then they face a penalty. It starts out at 1% of their Medicare, Medicaid and then Congress granted the administration the authority to get the 5% over a period to time, it's never been defined. So starting in October of 2014, if they don't have an EMR system, they're going to lose another 1%.

Rick D'Auteuil - Columbia Management

I mean is the expectation, are these hospitals sort of calling the bluff, and saying, I expect that to be pushed out. So therefore, I have more breathing room or?

James Boldt

I honestly think that they are just dealing with the problems that they have to currently. Many of the hospitals in the Unites States are losing money when the government cuts their Medicare by 2%, they are losing more money. A lot of them no longer have any capacity to borrow. So they're trying to figure out how they're going to make a smaller ones payroll now.

The larger ones, in addition, they are concerned because most of them have maybe a 2% or so operating margin 2% to 3%. They lost 0.5% of their operating margin. Many of them are concerned that they're going to begin to lower their cash, so the combination of dropping their operating margin plus having cash drop is going to lower their bond rating and they financed much of all their IT projects usually.

And they also have the other concern, which so much surprise me, but we've heard it from a couple of hospitals systems, of all the large systems in the United States are talking to smaller hospitals in their area. Those smaller hospitals can't survive, they're talking about merging. If a small hospital system merges into a larger one, the small hospital system has basically negative cash. So the larger systems usually has to put in an influx of cash in order to make the hospital stable, do things like EMR projects et cetera. So they're also trying to conserve their cash because they're negotiating with hospitals. And then, they know that there going to need it.

Rick D'Auteuil - Columbia Management

I mean, again, it's a feeling that the large hospitals are far enough along, but this October 2014 deadline or penalties isn't going to affect them. I mean in reality, if you haven't started a two-year project and you have one 15 months ago, you should really, I guess, get people, right?

James Boldt

I don't know, but its uniform among them though. I've talked to some, who are expecting the government to give them a break to delay that penalty. And I think that's what some of them are counting on. And I don't know that that's going to happen, because at the moment the government is trying to raise as much revenue as possible, and this is legislation that's already been passed. So at the moment they're dealing with the fact and literally laying-off their own employees to try and get their operating margins back up.

Rick D'Auteuil - Columbia Management

So here is another question. On those lay-offs, are you hearing or seeing resonate that the IT department is being hit directly, so therefore, it will push to more outsourcing?

James Boldt

Yes. We have gotten or seen people laying-off people in IT department. And we think this will push hospitals even further along towards outsourcing. We think the outsourcing business is going to be pretty good for the next couple of years.

Rick D'Auteuil - Columbia Management

And the same deadline holds true for ICD-10, right? That's had been pushed out a number of times and now we're thinking that's October '14 also, all right?

James Boldt

Yes, it is. And then on top of it for an EMR project, it's a capital project, because you're installing software ICD-10 they have to expand. So it's further eliminating their operating profit.

Rick D'Auteuil - Columbia Management

But the alternative is they have even more of your operating profit eliminated by being only able to code at the lowest common denominator, right, if they don't do it?

James Boldt

That's correct. You can map from nine to 10, but you're probably going to lose at least 3% of your Medicare or Medicaid revenue while you're doing that. You have articulated it pretty well. They are basically choosing between problems.

Rick D'Auteuil - Columbia Management

On the fraud, waste and abuse, SaaS model that the second customer that you're going to start getting revenue in the third quarter, was nicely larger than the first customer, is that correct?

James Boldt

Right, it's about twice the size of the first customer.

Rick D'Auteuil - Columbia Management

Can you characterize the third customer expected there and the relative size?

James Boldt

Well, it's a couple of billion dollars, which is still considered to be a small payer.

Rick D'Auteuil - Columbia Management

So more like the first one?

James Boldt

The first one is about half of its last. First one was of small payer, even in these small payer groups.

Rick D'Auteuil - Columbia Management

How about if there are pipeline above their data tests beyond those three?

James Boldt

The original set that we set up had six in it, which we started trying soliciting the second quarter of 2012. Those six were a combination of states and a larger payer. So every one of those is significantly larger than the two payers we're currently doing business with. In addition to that, I wanted the sales force to focus, so we started with those six. In January of 2013, we opened the aperture in there and there are actually more payers in states that we begun to call in.

Rick D'Auteuil - Columbia Management

Those are in data or are you just calling them?

James Boldt

Most of them were in the initial stages of talking to them about it. I think that there's probably a few of them that may have given us data that's still beta. Of the six we sold one, so there are five less and it's more likely that one of those will close before the end of the year than the ones we began to talk to in January of this year. It's a long sales cycle.

Rick D'Auteuil - Columbia Management

So going back just so I have the count right. So one you had last year, one you're going to start this quarter, another one you're expecting to start sometime this year and then the one you just referred to is that in addition to that third one or is it?

James Boldt

No.

Rick D'Auteuil - Columbia Management

So that is the third out of the six, so the other three are likely to go forward or not?

James Boldt

Let me go back and restate this. So in the second quarter of 2012, we had six data, in addition to that we had the customer that we sold last year, although they didn't actually begin to use the model until the third quarter. So they weren't one of the six data's that we talked about. They are actually a payer that we had worked with to develop the application. The payer that we signed up in April was one of the six. So now there is five left. And we think one of the five will likely close before the end of the year.

Rick D'Auteuil - Columbia Management

And again, the other four, are they proceeding to selling slower?

James Boldt

They are just going slower. We had only pulled one small payer into the six and it closed quicker than either a state or a large payer.

Operator

And we'll go to Bill Sutherland with EGE.

Bill Sutherland - EGE

So the hospitals that are involved with the EMR projects that you just started up with. Are they kind of slowing their ramp up or are they just providing more resources internally?

James Boldt

I think they are trying to provide maybe a little more resources internally. They were not getting the RECs that we usually get from them. A typical 1,000 bed hospital for someone who hasn't heard this before, needs about 75 people on their project, generally they will get 25 from us, will have kind of the top of pyramid. And then they will get 25 from their IT department and 25 from their clinicals, often nurses. Usually what happens when we start the project they realize they can't staff those 50 people that they thought they could. So they will actually give us RECs we're not obligated to fill those additional RECs because we didn't commit to them originally.

We're not getting as many of those RECs as we used to. And I suspect they're trying to fill up with some of the people they do in lay off. So they're moving some of their own people around. And they definitely are starting them up as slower. We have hospitals that normally when we start up a project, well they have a project manager and maybe a high-end consultant for the first 60 days to do the project plan. The third month out, then they will take about two month, third month out and they will put another maybe eight to 10 people on the project. And they are telling us, no, we're considering our cash. We only want to have three or four people and let the project end date slips them.

Bill Sutherland - EGE

So are you providing the standard top of the pyramid people?

James Boldt

Yes.

Bill Sutherland - EGE

So what you're talking about as the additional RECs you're getting just half of what you normally get?

James Boldt

Actually it's less than half. At the moment we're not getting many RECs at all from the additional people, where before it was common for a hospital system that says, when they actually went to staff it to discover that they were 10 or 15 or 20 people short.

Bill Sutherland - EGE

And looking into Q3, based on your expectations or projects that may finish up and stop and then as you build out before that began in Q2, do you think EMR starts to grow again? And I guess added into that would be as you're going into the quarter with how many RFPs?

James Boldt

We have one RFP that hasn't been answered and then we have one project that we want in the second quarter that's actually going to start up in the third quarter. We'll probably have, generally in the third quarter anyway we get more vacations, so even with the healthcare folks it tends to lower our revenue in the third quarter.

And right now, I think with the projects starting up and the project ending we're probably a fairly balanced in terms of our headcount for the third quarter. So I think it will be more like the second quarter, another way to put it in here.

Bill Sutherland - EGE

So then you've got the one RFP you mentioned that's opened but also you've got those two that you referenced, one large and one larger.

James Boldt

Yeah, actually, the one that's open is the 5,000 bed project that we bid on at the end of March. The other project, well, everyone has been expecting it to start up, we have never out an RFP. The RFP was supposed to be out on January of this year and they just keep delaying it.

Bill Sutherland - EGE

And is there a pipeline that you can kind of point to that suggests the pace of RFPs without the year?

James Boldt

There actually is. We don't like to disclose it, but quite frankly the pipeline at the beginning of this quarter is the same as it's been over the last four quarters. The number of RFPs that hospitals were telling us they're going to issue is just about the same. I expect a little bit more maybe than it was a year ago.

Bill Sutherland - EGE

One question on the data analytics, the medical management side, so I guess with the end-stage renal one in particular, what should we think about that moving into a commercial phase? And then also on the genomic sequencing capability, when does that impact revenue?

James Boldt

We actually are getting some revenue from them now, because we are working on the project with the one hospital system that we're really developing the offering with. I don't think the genomic sequencing other than one hospital is probably going to start until the second quarter of next year, because there aren't that many, but we haven't seen that many hospital systems looking for that kind of work yet. But this is kind of leading edge.

Though, the hospitals that we're working with, they actually plans on creating an institute that you'll be able to send them the DNA test and perhaps a sample of the tumor. And they will do the genomic sequencing for you and will tie it into your EMR. So we're making some revenue in 2014 from that.

And that was your second question. The other was the SaaS offerings, the IT medical management model, we are actually now trying to put together an offering and we're doing exactly what you suggested, the science that's most matured, if you will, is the end-stage urinal disease and when a person is end-stage urinal disease, most people's kidney's fail and there is a crash, it's called.

And they end up in an emergency room. And the emergency room has to treat them for that. And the cost of doing that is on average between $30,000 and $40,000 and we can prevent those crashes. We actually can plot it out and say, this is the point that the patient is going to crash. And if you send them to a specialist before that, the specialists can intervene.

So we have developed an offering, we have doctors, nephrologists that are willing to say that they've already used and it works. And now we have to get somebody to pay for it. The logical client, really are payers. We can reduce the cost, their cost in treating patients by switching the patients to a specialist before the crash occurs. And we have the technology we're really marketing that.

Bill Sutherland - EGE

So you are going to the payers with something that is a real offering in other words?

James Boldt

Yeah.

Operator

And we have a follow-up question from Rick D'Auteuil with Columbia Management.

Rick D'Auteuil - Columbia Management

Just to put some clarity. I know you made the etrinity acquisition. What was the organic growth in Europe in this quarter?

James Boldt

Brendan I think you take that one.

Brendan Harrington

It was 6%, Rick, and then in constant currency it was 4.5%.

Rick D'Auteuil - Columbia Management

The buyback, I know you would do at $25, while you're in the quite period. The last execution of that plan was around $20, you've broken that today, presumably, you're interested in activating or being active in the market again, is that fair?

James Boldt

Yes. We won't know until tomorrow, but I suspect that today under their plan that they probably brought some shares.

Rick D'Auteuil - Columbia Management

On the solution side of the business, you mentioned financial was getting better. We heard that has improved materially. Are you seeing that? Give me a sense of how much that's improved?

James Boldt

Well, in the quarter our financial services business was up 9%. So that definitely is an improvement from what's it's been in the past. But our financial services business 90%, 95% of it is especially in Europe, so we may not always attract to the trends that are here in the United States.

Rick D'Auteuil - Columbia Management

So are you seeing the United States piece pick up or is that just not a focus?

James Boldt

It's not a focus. We have some staffing business in the United States, but we don't go to marketable solutions, they do go to marketable solutions in Europe.

Rick D'Auteuil - Columbia Management

And on energy, that is the domestic, actually it was Canada too I think before, but has the big customer come back there or is this other customer strengthening?

James Boldt

It's a combination actually of both. It's our existing large customer, who after a period of reducing their spending is coming back and we've got some other customers in not our typical areas. So they're not all oil anymore. They're some of the newer technologies.

Rick D'Auteuil - Columbia Management

And then, given the tightness of the market on healthcare IT talent, we have seen billing rate increases. You're saying, just over the last 30 days, you've seen a lot of supply has that impacted rates at all?

James Boldt

No, not yet. No. And I don't know that there is surplus out there. Though, it's much easier to find people than it was before. We think the market is now probably back more in equilibrium. But it's definitely not tightened.

Rick D'Auteuil - Columbia Management

And as you built in incremental inflation, labor inflation that maybe we shouldn't been thinking about now?

James Boldt

Well, the rates tend to go up in the early part of the year. And we think that those will stabilize. So the inflation probably will occur, that we expected.

Operator

And we'll go to line of Frank Sparacino with First Analysis.

Frank Sparacino - First Analysis

I was curious, at some point, the hospitals will obviously have to address ICD-10, do you feel that once they begin to do that that there is risk to further delays on the EMR side of the business or I'm just trying to figure out from an IT budgets standpoint, the budgets aren't growing or shrinking? Are we just seeing the dollar is being reallocated and what sort of the prior list right now?

James Boldt

I suspect that the hospitals who did the EMR project and are up at least convenient for just one, will start the ICD project lot quicker than the ones that haven't. And this is kind of, you're damned if you do, damned if you don't right, which one you're going to pick? Are you going to pick the penalty that you're going to get if you don't make the EMR date? And then hospitals still, it's kind of amazing on sometimes to be talking to somebody on a hospital and they still think in the past, the government's have given them past, so the government will give them more time to get this done.

Frank Sparacino - First Analysis

And assuming that the ICD-10 issue will be much more painful in terms of impact dollar-wise from a billing perspective and simply the EMR side of things?

James Boldt

It is. It's also more painful when they're doing it because they have to expand. So it's larger, you are right. I mean the date, it's the same it's larger, it's 3% probably versus 1% and they have to expand now or when we start.

Operator

I will go to now Frank DiLorenzo with Singular Research.

Frank DiLorenzo - Singular Research

On the EMR side, do you have the figure for the average number of days per project for second quarter of 2013, also the second quarter of 2012? And I was just also wondering if you have any visibility going into the next year as far as what that figure could potentially be based on your current projects, what might be in the pipeline?

James Boldt

I don't have a figure in front of me on the average number of beds. I don't think that it has changed very much. We've been running between the 1,000 and 1,500 beds on average on the projects for quiet some time now. If the large projects start up, obviously, their numbers going to go up, but they keep getting delayed.

Frank DiLorenzo - Singular Research

What's potentially after, are they mostly larger deals or is there the potential for maybe so smaller projects, moving forward I think you're focused maybe around some bigger EMR type deals? And just wondering if that's the trend or if there's anything opening out on the smaller side of the business potentially?

James Boldt

No. Actually in our pipeline, right now, we have as many 1,000 to 2,000 bed systems in the pipeline that are looking at EMR projects as we've had in the past. In addition to that what we have is some larger projects. So we haven't really seen a change in terms of the pipeline, in terms of the 1,000 to 2,000 bed projects.

Frank DiLorenzo - Singular Research

Just one other follow-up, visibility, is there better visibility potentially going into the first half of 2014, the second half of 2014? And on the EMR side, do you have the potential to have this, maybe its too much detail, but the potential to have the same number of deals currently been worked on as you did today? Is there the potential to see that the number of deals you have under your umbrella increased the number of beds per deal increase or is that a little early, too early on to kind of look at that type of detail?

James Boldt

I think it's too early to tell that. The hospitals are dealing with what happened to them in April. I think that they have to and every field that I've talked to, certainly for our hospitals says that they've got a group together, trying to figure out how to cut their cost. I think they have to get through their process. They have to get through the process of how to deal with the sequester before they start to think about next year.

Operator

And speakers, I'll turn it back to you for any closing comments.

James Boldt

Thank you. CTG is firmly established in healthcare, one of the fastest growing major U.S. industries. But on the short-term our hospital clients have to deal with the reimbursement reductions imposed by the U.S. federal government. They still have significant long-term information technology needs.

We have offerings to meet the needs of the IT providers and payers, including electronic medical records, fraud, waste and abuse, ICD-10 conversions, accountable care organizations, genomic sequencing and IT medical management models for chronic diseases, all of which are expected to be in strong demand for several years. As such, we remain excited about CTG's long-term future growth prospects.

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

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 11:30 AM today running through July 26 until midnight. You may access the AT&T replay system at any time by dialing 1800-475-6701 or 1320-365-3844, and when prompted, enter the access code of 269074. Those numbers again, 1800-475-6701 or 1320-365-3844, access code 269074. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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