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Mastech Holdings, Inc. (NYSEMKT:MHH)

Q3 2013 Results Earnings Call

October 23, 2013 9:00 AM ET

Executives

Jennifer Ford Lacey - Manager, Legal Affairs

Kevin Horner - Chief Executive Officer

Jack Cronin - Chief Financial Officer

Analysts

Howard Rosencrans - Value Advisory

David Polonitza - AB Value Management

Brian Warner - Performance Capital

Operator

Greetings. And welcome to the Mastech Holdings Incorporated Q3 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, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Holdings Incorporated. Thank you, Ms. Ford Lacey. You may begin.

Jennifer Ford Lacey

Thank you, Operator. And welcome to Mastech's third 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 in the markets in which we operate.

Without limiting the foregoing, the words believe, 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 third quarter 2013 results.

Jack Cronin

Thanks, Jen, and good morning all. First off, I’d like to remind everyone of the sale of our healthcare segment that occurred during the third quarter. Please note that our financial statements have been recast to include the healthcare business as discontinued operations for all periods including references and comparisons to prior years. Accordingly, all financial results discussed today relate to continuing operations unless specifically noted otherwise.

With that clarification out of the way, I’m pleased to report revenues for the third quarter of 2013 totaled $28.3 million or approximately 24% higher than third quarter 2012 revenues and represented an 8% improvement over the second quarter of 2013.

Our IT operations continued to see solid activity levels during the quarter as we grew our consultants on billing for the third consecutive quarter. Over the last nine months, our billable IT consultant base has increased at an annualized rate of over 20%.

Gross profit for the third quarter of 2013 totaled $5.3 million or 18.9% of revenues, compared to $4.4 million or 19.2% of revenues during the same period last year.

Our gross profit expansion reflected an increase in billable consultants on assignment in the third quarter of 2013, compared to the corresponding 2012 period, as well as an average bill rate that has been trending up over the past several quarters.

The slight gross margin decline reflects the continued shift towards our wholesale channel and a manageable increase in bench costs. With the remarketing of bench candidate at near all-time highs, we are willing to incur more bench costs to allow this remarketing effort to play out a little longer.

SG&A expenses were $3.7 million in the third quarter of 2013, compared to $3.5 million in the third quarter last year. SG&A expenses represented 12.9% of total revenues in the third quarter of 2013, compared to 15.4% of revenues in the corresponding period of 2012.

While we will continue to add productive capacity to both our sales and recruitment organizations, the operating leverage of our business model should allow us to continue to drive down SG&A expenses as a percent of total revenues as we grow our revenues in the future.

Net income from continuing operations for the third quarter of 2013 was $999,000 or $0.29 per diluted share, compared $561,000 or $0.17 per diluted share in the third quarter of 2012.

Discontinued operations during the third quarter of 2013 added additional net income of $481,000 or $0.14 per diluted share, compared to $40,000 or $0.01 per diluted share in the corresponding 2012 period. The results in the 2013 quarter included a net gain on the sale of our healthcare business of $422,000 or $0.13 per diluted share.

Addressing our financial position at September 30, 2013, we had cash balances on hand of $1.6 million, no outstanding debt and over $15 million of borrowing capacity under our existing credit facility.

During the quarter we repaid $2.6 million of bank debt with funds generated from both continuing and discontinued operations. While we continue to invest in operating working capital during the quarter to support our revenue expansion, a two-day improvement in our accounts receivable day sales outstanding measurement mitigated those investments in Q3.

In summary, we like where we sit financially and we like the flexibility that our strong balance sheet and excess to capital gives us moving forward.

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

Kevin Horner

Thank you, Jack, and good morning all. I'm really pleased to report another quality quarter of Mastech. As Jack mentioned, we completed the sale of our healthcare staffing business during the quarter and generated the handsome profit in doing so.

However in my view, the bigger benefit of the sale from Mastech is focus. Everyone in our business is now focused squarely on our core competency, IT staffing. All of our time, all of our energy and all of our capital resources are now locked onto one objective, making Mastech one of the premier IT staffing organizations in the industry.

With the deployment of the different business model than most of our public peers, we have an opportunity to differentiate ourselves and prove directly with both performance and financial results that are models of better solution in today’s business environment.

Speaking of our financial results, let me recap a few of our third quarter 2013 results. Year-over-year revenue growth of 24%, sequential quarter-over-quarter revenue growth of 8%, consultant on billing growth at an annualized rate of approximately 22% over the last nine months period, and sequentially consultant on billing growth rate at 3%. 95% year-over-year improvement in operating profits.

SG&A expenses now represent less than 13% of our total revenues. Over the last several quarters, Jack and I have talked a lot about our leverageable cost structure which plays directly to our business model. Now, you’re seeing it in action.

Most of our public peers are no where near 13% SG&A expense on revenue. We also achieved record diluted earnings per share numbers. Total EPS for the quarter was $0.43 and $0.29 of that was directly from continuing operations, both numbers are record performances since Mastech has gone standalone public in Q4 2008.

Additionally, we strengthened our already strong balance sheet by paying off $2.6 million of debt and improving our accounts receivable DSO measure.

On just about all accounts, a really wonderful quarter for our company, I’d like to offer well done to the team of Mastech and a huge thank you to our clients that we continue to focus on and to serve through this optimized business model.

Additional importance, we continue to perform well behind the financials. Operationally, we continue to see incremental improvements from both our sales and recruitment organizations during the quarter. With a proven ability to scale our offshore recruitment organizations, we are now focusing more on our new client acquisition engine and will be making investments in this area over the next several quarters.

Culture labor coming together as an organization, both our U.S. and Indian based employees are executing at a high level. We’re continuing to work better as a team. Our attitudes remain off peak and organizationally, we’re buying into the concepts of continued incremental improvements in the way we perform our business day in and day out.

Creative thinking and higher energy has become contagious of the company and I believe it will serve all of our constituencies well.

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

At this time, I’d like to open up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Howard Rosencrans with Value Advisory. Please proceed with your question.

Howard Rosencrans - Value Advisory

Hi, guys.

Kevin Horner

Hi, Howard.

Howard Rosencrans - Value Advisory

In terms of your billable consultancy, a metric you have given us in prior quarters. What were they up and is that -- are we entering a seasonally slow period now or is demand levels going to offset that?

Kevin Horner

I actually think -- yeah, we -- if you look at our last three quarters or just look at 2013, in the first quarter we had made a sequential growth rate of 4%. In the second quarter, we had a sequential growth rate of 9% and this quarter, we had a sequential growth rate of 3%. You annualize that and we are close to about 21%, 22% growth in COB for the year. So, Howard, I feel very good about our growth rates there. I think, I think we had a knockout -- we had a knockout quarter in the second quarter in terms of how we grew our consultants on billing and obviously that shows up then in Q3. But I feel very, very comfortable with the performance of the organization in Q3.

Howard Rosencrans - Value Advisory

Okay. Thank you.

Operator

And 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 quarter.

Kevin Horner

Thanks, Dave.

Jack Cronin

Thanks, Dave.

David Polonitza - AB Value Management

Just want to know if you can comment on the pricing environment from assignments. You mentioned about bench costs and you're willing -- it seems like you are willing to sacrifice a little bit of gross margin today for long-term benefits, provide any color on that?

Kevin Horner

Yeah. Our bench cost increased and it was -- I think in third quarter, our year-over-year gross margin percentage declined by 30 basis points. I think the bench cost increase was a little less than half of that. So it’s not like we're opening up the gates for bench cost but there are some skill sets that we will keep on bench a little longer than we did a year ago and just because we are having success in remarketing these, folks.

Jack Cronin

Dave, merely add to that would be the IT market in the United States which is our marketplace, right. The IT marketplace for jobs in the U.S. is still at an all-time high for IT jobs in the United States. So we make conscious decisions around skills and skill sets to remarket people as they come off of one assignment and into another simply because those skills were tremendously desired in the market.

David Polonitza - AB Value Management

And also you’ve mentioned your new client prospects. In the past, it seems like you focused a lot on your existing client base, the IBMs of the world. Is there a reason why now you see an opportunity for some new clients?

Kevin Horner

Yeah. I appreciate the question. For those of you who followed us for many quarters, our focus through 2012 and through the first two quarters of 2013, has been to train and develop our offshore recruiting model. So we’ve spent a lot of time and energy proving that model out and ensuring that it was capable and scalable. And so what you see us telling everyone in the third quarter is we are now willing to invest further in that model on the sales side to go bring additional new large consuming clients into our business model.

David Polonitza - AB Value Management

And one final question here. You mentioned you look to capitalize on future value creating opportunities, any options you are currently looking at with regards to that?

Kevin Horner

There are several strategic opportunities that the management team and the board are discussing right now, probably not a liberty to talk about any of those in much more details in that text.

David Polonitza - AB Value Management

Okay. Great. Thanks again. I appreciate it.

Operator

(Operator Instructions) Our next question comes from the line of Brian Warner with Performance Capital. Please proceed with your question.

Brian Warner - Performance Capital

Hi, guys. Well done.

Kevin Horner

Thanks, Brian.

Brian Warner - Performance Capital

You are welcome. I am just wondering how you are feeling about the potential for acquisition candidates out there if, sort of, there is anything out there, that might be of interest to you guys or what -- if the stuff you look at that you think might make sense or it’s really sort of hard because your model sort of so different than most of the guys?

Kevin Horner

Actually we have looked (inaudible) and we -- and it actually just in last two quarters we’ve been -- been in fairly hot pursuit of a couple, but nothing panned out in either case. But now I think our business model would lend itself to be -- to an acquisition strategy now that we’ve got the recruiting engine capable and scalable.

Brian Warner - Performance Capital

I see. Thanks very much.

Operator

(Operator Instructions) Okay. And it seems we have no questions at this time. I’d like to turn the floor back over for closing comments.

Kevin Horner

Great. So considering there are no further questions, I would like to thank everyone for joining our call today and we look forward to sharing our fourth quarter 2013 results with you in late January. So thanks all and everyone have a great day.

Operator

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

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