Mastech Holdings, Inc. (MHH) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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

Mastech Holdings, Inc. (NYSEMKT:MHH)

Q2 2013 Earnings Conference Call

July 24, 2013 9:00 ET

Executives

Jennifer Ford Lacey – Manager of Legal Affairs

Jack Cronin – CFO, VP of Finance and Administration

Kevin Horner – President, CEO

Analysts

David Polonitza – AB Value Management

Howard Rosencrans – Value Advisory

Operator

Greetings, and welcome to the Mastech Holdings, Inc. Second Quarter 2013 Earnings Conference 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, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Holdings. Thank you, Miss, you may begin.

Jennifer Ford Lacey

Thank you, Operator, and welcome to Mastech's second 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, intentions 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 other 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 second quarter 2013 results.

Jack Cronin

Thanks, Jen, and good morning, everyone. Revenues for the second quarter of 2013 totaled $28.9 million, or approximately 14% higher than second quarter 2012 revenues, and represented a 7% improvement over the first quarter of 2013.

Our IT operations continued to see solid activity levels during the quarter as we grew our consultants on billing by 9% in Q2.

Market conditions in our healthcare operations were in line with last quarter from an activity standpoint. However, higher assignment ends in our travel nursing business negatively impacted revenues during the quarter.

Gross profits for the second quarter of 2013 totaled $5.5 million or 18.9% of revenues, compared to $4.8 million or 19.1% of revenues during the same period last year.

Despite being down 20 basis points from last year's margin performance, it's important to note that we were 80 basis points higher than the previously reported quarter.

Our gross profit expansion reflects an increase in billable consultants on assignment in the second quarter of 2013, compared to the corresponding 2012 period.

Our slight gross margin erosion was due to declines in our healthcare business largely the result of an unfavorable service offering mix of revenues.

SG&A expenses were $4.2 million in the second quarter of 2013, which was slightly higher than last year's $4.1 million.

SG&A expenses represented 14.5% of total revenues in the second quarter of 2013, compared to 16% of revenues in the corresponding 2012 period.

While we prudently added productive capacity to both our sales and recruitment organizations during the quarter, we continued to rationalize every aspect of our SG&A expense.

Accordingly, net income for the second quarter of 2013 was $789,000 or $0.23 per diluted share, compared to $458,000 or $0.14 per diluted share in the second quarter of 2012.

Addressing our financial position, at June 30, 2013, we had outstanding borrowings, net of cash balances on hand, of $2.9 million, and had borrowing capacity of approximately $14 million under our existing credit facility.

During the quarter, our primary source or our primary use of cash was for investments and operating working capital to support our revenue expansion. In our view, that's a very healthy use of cash.

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

Kevin Horner

Thanks, Jack, and good morning all.

I am pleased to report another quarter of impressive year-over-year top line and bottom line growth at Mastech. As Jack had said on a year-over-year basis, we grew revenues by over 14% and increased diluted earnings per share by 64%.

More impressively, sequentially, our performance was equally inspiring with revenue growth of 7% and an earnings per share improvement of 35%.

Additionally, we expanded the number of our IT billable consultants by 9% for the quarter, which is one of our best performances over the last five years that the Company's been public.

I'd like to offer a well-done to the team at Mastech and, importantly, a thank you to our clients.

Operationally, we continue to see steady incremental improvements from both our sales and recruiting organizations. Our activity levels during Q2 were largely in line with the previous quarter, yet all of our key operational metrics, including assignment wins were materially up during the quarter. Clearly, we're starting to see payback from our focused investments to our offshore recruiting organization.

Having recently returned from visits to both our Bangalore and New Delhi recruitment centers, I can tell you that I'm excited about the quality and the passion of our staff and the high energy environment that I saw while I was there.

As I said in last quarter's call, it's been very satisfying for me to see this transformation occurring in the organization. I believe this upbeat attitude will continue to drive quality financial results and will enhance the value proposition that we offer our clients.

To that end, we intend to continue to invest. We will invest in our recruiting team and we will invest in our sales team.

Our teams have proven to me that they take our investment strategies seriously and are willing to drive return on that investment.

Once again, thanks to the Mastech team, to our customers and to all of our stakeholders for a great quarter.

At this point in time, I'd like to open it up for questions.

Question-and-answer Session

Operator

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

Thank you. Our first question comes from the line of Howard Rosencrans with Value Advisory.

Brian Warner - Value Advisory

Hi, guys. It’s actually Brian Warner with Howard. I got three quick questions for you.

One, could you sort of flesh out the assignment end on the nursing side and sort of what impact that had maybe on your top line?

Second real quick question – were you guys in the market at all to repurchase any stock?

And third question – you made a reference in your press release to – you're sort of seeing the potential for a more disciplined bidding on assignments and that might – seems it sounds like tweaked the gross margin higher. Could you just give us a little color on that?

Kevin Horner

Sure. Let me try to do the easy one first. We have not been in the market repurchasing anything.

Jack Cronin

In June, we repurchased a few thousand shares. But that's…

Kevin Horner

But that was early in June.

Jack Cronin

Yes, yes.

Kevin Horner

So…

Brian Warner - Value Advisory

Got you.

Kevin Horner

Yes. So, your gross margin question…

Brian Warner - Value Advisory

Yes.

Kevin Horner

Yes. Let's try that one. I think this is really simply the impact of our organization changes taking hold. The changes that we made at the beginning of the year with our new COO. And fundamentally, he's brought some discipline into our sales processes, specifically, around gross margin dollars and gross margin dollars – or gross margin percentages.

And it's not rocket science in our business, right? It's a much more disciplined execution than it is a rocket science question.

So, really, I think what we're doing is we're taking a much closer look at every single deal we do. And we're working those deals to get best opportunity for three basic stakeholders – for our customers, for our consultants and for our company, so, you know, we're focusing on those three. And I think we've done a much better job in our second quarter than we did earlier in the year.

Brian Warner - Value Advisory

Got you.

Kevin Horner

Yes. To the – Yes, the travel nursing and – you want to take that Jack.

Jack Cronin

Yes. It was, the higher level event, it probably cost us about $200,000 of revenue.

Brian Warner - Value Advisory

Got you.

Jack Cronin

For the quarter

Brian Warner - Value Advisory

Got it. Thanks very much, guys. Congratulations.

Kevin Horner

Thanks.

Operator

(Operator Instructions). Our next question comes from the line of David Polonitza with AB Value Management. Please, proceed with your question.

David Polonitza – AB Value Management

Hey, guys. Good morning. Wanted to ask on the revenue growth numbers, very strong numbers, is – was that coming from most of the existing contracts or clients? Or do you guys bring on some new business recently?

Kevin Horner

Yes. Principally, Dave, that's working our strategy of growing inside of our large scale existing customers, so that's been principally about continuing to work our large customer base with, again – with a bunch of more discipline.

David Polonitza – AB Value Management

Okay. And I know in the past – you might have addressed this – but do you have any comments about the whole visa and immigration situation maybe for people, who haven't heard how that might affect Mastech in both a positive or a negative way?

Kevin Horner

Yes. I'll take a shot. The – so, let me set context from the perspective of the sweeping immigration change bill that has passed the Senate, right, and is sitting in front of the House – and I don't want to talk politics, I just want to make sure that we set context around what will bounce up against is Mastech's business against that Senate bill.

You know at the end of the day, we like it and we like it pretty significantly simply because the definitions in that bill align well to our business.

So, let me talk a little bit about the fact that our business – we have roughly 725 consultants on billing today and about 80% to 85% of those are our own employees, about – roughly 100 of those are either corp to corp or 1099 vendors.

Inside of that employee base, we split about 55-45 between the US citizens and H-1B visa holders. Those H-1B visa holder portion of our population, we are generally speaking not an importer of talent, we are working with H-1Bs that are currently on the ground in the US, and we have a great reputation for – as an employer.

So, generally speaking, we end up with people coming to us wanting us to employ them. And part of that employment contract – when we employ an H-1B is we actually file for the Green Card generally speaking at the same time.

And our theory on that is what we want to create is a long-term path to citizenship. That's really the way we play the game and it's a – we're looking for a long-term citizen/voter/a home owner/tax payer. That's really what our strategy has been. And that's not a Kevin strategy; that's not something different. That's been here for a long time, inside of our organization.

So, when you look at the Senate bill, with us approaching that visa marketplace that way, we're actually advantaged. And so we like it.

So, our standard business practice fits very nicely into that bill.

Does that help you, Dave?

David Polonitza – AB Value Management

Yes. No, that definitely does. And the only other question I had you know you mentioned the Company has increased assignment wins during this quarter. What are some of the reasons for the Company being able to improve in that metric?

Kevin Horner

A personal belief is the investments that we have made principally on the recruiting side of our organization and those investments go to both our own internal talent acquisition processes and the fact that we've actually done a much better job over the last 12 months of acquiring recruiting talent. And then, secondly, the investments we’ve made in training, in development, and education for that recruiting population of folks. We've spent a lot of time and money helping to develop that team, with both on-the-ground leadership in our recruiting centers in Bangalore and in Noida and with some recruiting expertise out of our Pittsburgh office that has over the last 12 months spent a lot of time on planes and trains and automobiles between Pittsburgh and India.

David Polonitza – AB Value Management

And what type of capacity in the past – you know, in the quarters that have been reported already, do you guys add to the recruitment organization?

Kevin Horner

Boy, that's a tough question. Dave, I can't answer that exactly. I just don't have the number in front of me.

David Polonitza – AB Value Management

Sure.

Kevin Horner

But I can get it. My suspicion is we're probably close to flat Q2 to Q1; I don't think it's appreciably different.

I think the key for us in the second quarter has been all about the development of the talent that's on the ground. And that's where we're getting the wins; we're getting wins based on productivity and effectiveness.

David Polonitza – AB Value Management

Great. Well, congratulations, guys, and I appreciate all the good work you did.

Kevin Horner

Thanks.

Operator

Our next question is a follow-up question from the line of Howard Rosencrans with Value Advisory. Please, proceed with your question.

Howard Rosencrans – Value Advisory

Hi, guys. Congrats on a great quarter.

Kevin Horner

Thanks.

Howard Rosencrans – Value Advisory

This is Howard Rosencrans. The – three questions. The SG&A leverage you got in the quarter, is that sustainable? I mean you picked up 150 bps, that's pretty incredible. Do we have to have this sort of top – if we can do this sort of top line growth to where we add 9% on billings and 14% on top line, is that sort of a level of SG&A we can look at going forward?

Kevin Horner

Yes. Howard, without giving guidance, I think you may recall from our presentation in June – that's a of Sidoti conference – that's – probably, it gets out on our website and so on and so forth.

I think what we told folks, as part of our goals would be we intend to drive SG&A as a percent of revenue down to the 13% to 14% range over the next couple of years. And I believe that what you see in the second quarter is just an outcome of that focus around how we want to spend our SG&A dollar.

Now, what I don't want is to drive anybody to think that we are over managing our cost structure because, frankly speaking, we're not. We are really focused on growing the top line. And as I said in my remarks, we will continue to invest in both our sales team and in our recruiting team.

So, we absolutely have evolved to grow the top line with our existing customer base at least one and a half times the way our publicly traded peers are growing. So, that's our goal.

Howard Rosencrans – Value Advisory

And then, a couple of follow-ons there. Your gross margins – and I guess could you give us a little more color on your – on the revenue growth, in terms of – I mean you have the consultants on bill of 9%. Is your margin being driven by – is it pricing on the same sort of contracts? Or is it a better mix?

Is it more on mix? And is it more on mix and that's driving your gross margin?

Jack Cronin

You know in the IT, it's really not – it's all about your gross margins on the new starts versus your gross margins on the projects that you win. And you know in second quarter our gross margin percentage on our new wins – coming into the Company – has been greater than what has been going out than projects in.

Howard Rosencrans – Value Advisory

Okay. Okay. And can you give us any – a little bit more on the buybacks? You have the big authorized buybacks. Why are you holding back?

Kevin Horner

Well, but part of the – but part of – interestingly enough, part of the buyback process is the amount we can buy is governed, right, by the – by what's been traded, right?

Howard Rosencrans – Value Advisory

Yes.

Kevin Horner

And as you know we're fairly (fittedly) traded.

Now, what we are always willing to do is buyback in a block. So, if any of our shareholders or investors would like to sell something in a block, we are more than happy to do that. And there are mechanisms – in twice to be able to do that and to our agents.

So, we're more than happy to do that in a block but we'll leave the market at, I guess – we will come out of a – out of this quiet period – in this non-trading period in a couple of days and we will continue to examine, whether it makes any sense to buyback or not.

Yes. At this point in time, it's – I – we will continue to examine it, right. And it's a question about do we use cash to drive growth? Or do we use cash to buy back.

Jack Cronin

Yes.

Howard Rosencrans – Value Advisory

Last question – any thoughts on the pipeline that you have now? I mean you sort of alluded to it but I'm not sure if pipeline or backlog – whatever you want to – I guess, that was backlog per se.

Kevin Horner

Yes. So, again, I wanted to be careful that we're – what we say is a (inaudible) guidance.

I think there are couple of things you can take away from our – from the information that we've – that we've got publicly out there.

Number one – a 9% sequential grow rate on consultants on billing is – number one – it's an impressive number.

Number two – it does begin to allow people to do some analysis on what you might think that means from a forward fair point. I can't do that analysis, you'll have to do that analysis. But you know you can do that analysis with that might means – forward looking.

Howard Rosencrans – Value Advisory

Okay.

Kevin Horner

Secondly, we've – as I've been saying now for several quarters...

Howard Rosencrans – Value Advisory

Yes.

Kevin Horner

And as I said at the Sidoti Conference, we have really large-scale customers who are large-scale consumers of IT services. And we will continue to work that customer base. And our intent is to get – to win share; we expect to win share in that space. And that – if you want to think about that as pipeline, but we've got the largest consumers of IT services – of IT contingent labor in the US are all customers.

And so, frankly speaking, we've got more demand than we can shake a (stick) at from our existing customer base. Doesn't mean we don't want new customers because we'll be focusing there at the second half of the year but we – you know – we – our focus has been to grow that engine on the recruitment side, so that we can handle the demand that we already have. And I feel pretty comfortable that we've been successful with that over the last several quarters.

Howard Rosencrans – Value Advisory

Thank you very much, and congrats again.

Kevin Horner

Thanks, Howard.

Operator

(Operator Instructions). One moment, please, while we re-poll for any additional question.

Mr. Horner, it appears we have no further questions at this time. I'd now like to turn the floor back over to you for additional or closing comments.

Kevin Horner

Well, assuming there are no more questions, I'd like to thank everyone for joining the call today. We'd look forward to sharing our third quarter 2013 results with you on late October and everyone have a great way. Thanks much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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