Computer Task Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: Computer Task (CTG)

Computer Task Group, Inc. (NASDAQ:CTG)

Q4 2013 Earnings Conference Call

February 25, 2014 8:30 a.m. ET

Executives

James Culligan - Director, Investor Relations

James Boldt - Chairman, President and Chief Executive Officer

Brendan Harrington - Senior Vice President and Chief Financial Officer

Analysts

Brian Kinstlinger - Sidoti

Vince Colicchio - Noble Financial

Rick D'Auteuil - Columbia Management

Bill O'Loughlin - O'Loughlin Financial Group

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the CTG Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) And as a reminder, your conference is being recorded.

I'd now like to turn the conference over to your host, Mr. James Culligan, Director of Investor Relations at CTG. Please go ahead.

James Culligan

Thank you, (Dolores), good morning everyone. We certainly appreciate your time and interest in CTG.

On the call today we have CTG's CEO, Jim Boldt; and Brendan Harrington, Senior Vice President and CFO. Jim and Brendan are going to review the results for the fourth 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 fourth quarter conference call. As you saw in our news release, our revenues decreased when compared to last year, as we continue to experience delays in healthcare project starts, as hospitals deal with lower reimbursements from the government, and as we experienced a reduction in spending from a significant staffing customer.

Our focus on expense control partially offset the impact from lower than forecasted sales revenue in the quarter, the net of which caused our earnings per share to come in at the low end of our guidance.

I'm going to talk more about our results and what we see for the 2014 first quarter and full year, but first I'm going to ask Brendan to start off with a review of our 2013 fourth quarter and full year financial results. Brendan?

Brendan Harrington

Thanks, Jim. Good morning, everyone. For the fourth quarter of 2013, CTG's revenue was $102.7 million, a decrease of $5.2 million compared with the fourth quarter of 2012. Fourth quarter 2013 had 65 billing days, one more than the fourth quarter 2012.

Solutions revenue in the fourth quarter of 2013 totaled $40.4 million, a decrease of $4.9 million or 10.7% compared to the fourth quarter of 2012, primarily due to lower revenue from electronic medical record project. As a percentage of total revenue, Solutions revenue was 39% compared to 42% a year ago.

Staffing revenue in the quarter decreased by $0.3 million or half a percent to $62.3 million, reflecting reductions in staffing from a large client offset by higher demand for technical resources from several other clients.

Fourth quarter revenue from IBM, our largest customer, was $22.4 million compared with $27.9 million in fourth quarter 2012. As a percent of total revenue, revenue from IBM decreased to 22.8% in the 2013 fourth quarter, compared with 25.8% of total revenue in the 2012 fourth quarter.

Revenue from our European operations was $20.9 million, a 14% increase from the $18.3 million recorded in last year's fourth quarter. The effect of foreign currency fluctuations during the fourth quarter of 2013 increased consolidated revenue by approximately $900,000.

On a local currency basis, our European revenue increased by 8.7% compared with the 2012 fourth quarter. Excluding the effect of the etrinity acquisition that we closed in February 2013, European revenue increased by 10.4% in U.S. dollars or 5.4% in constant currency.

Direct costs as a percentage of revenue were 78.3% in the fourth quarter, the same as in the fourth quarter of 2012.

SG&A expenses decreased approximately $900,000 from the fourth quarter of 2012 and remained at 15.8% of revenue, primarily as a result of fewer non-billable personnel and lower incentive compensation expenses.

The billable travel expenses, including the fourth quarter 2013 revenue and direct costs were $2.8 million. The billable travel expenses for the fourth quarter of 2012 totaled $3.2 million.

Fourth quarter operating income was $6.1 million, a decrease of approximately $300,000 or 4.8% year-over-year. Operating margin in the fourth quarter was 5.9% of revenue, the same as last year.

The year-over-year decrease in our operating income was due primarily to decreases in our health solutions revenue, offset by the lower SG&A expenses.

Net income in the fourth quarter was $3.7 million, a decrease of $320,000 or 8% compared to the fourth quarter of 2012, excluding a gain from life insurance proceeds recorded in the fourth quarter of 2012.

On a per diluted share basis, net income was $0.22 for the quarter, a $0.02 decrease compared to the fourth quarter of 2012, after excluding the gain from life insurance proceeds.

The decrease in earnings per share is due to lower operating income and a higher income tax rate in the fourth quarter of 2013. The tax rate for the 2013 fourth quarter was 38.4%, compared to 35.8% in the 2012 fourth quarter, excluding the effect of life insurance proceeds. This lower rate in the fourth quarter of 2012 was primarily the result of the reversal of certain tax reserves that did not occur in the fourth quarter of 2013.

We expect the tax rate in the first quarter of 2014 to be between 39% and 41%. The higher estimated rate in the fourth quarter is a result of certain federal tax credit loss, not yet being extended for 2014.

We expect the tax rate for the full year 2014 to be between 38% and 40%, compared to 35.6% for 2013. The higher estimated rate in 2014 as a result of certain federal tax credits related to 2012, which were recorded in 2013 because of the legislation relating to those 2012 tax credit was not passed until January 2013.

The 2013 fourth quarter results include equity compensation expense of approximately $0.03 per diluted share, net of tax, while the fourth quarter 2012 included equity compensation expense of $0.02 per diluted share, net of tax.

Our headcount at the end of the fourth quarter was 3700, a decrease of 100 people or 2.6% compared to the end of the third quarter 2013, and 200 fewer at the end of the fourth quarter 2012. Of the 3700 employees at the end of the fourth quarter 2013, 91% were billable resources.

At the end of the fourth quarter 2013 we had no debt and $46.2 million of cash on the balance sheet compared to no debt and $40.6 million of cash at the end of the fourth quarter 2012. Both the fourth quarter of 2013 and 2012 ended between U.S. by weekly payroll basis.

Our day sales outstanding was 62 days at the end of the fourth quarter 2013, compared to 68 at the end of the third quarter 2013. The decrease of DSO was to the timing of the cash proceeds received at the end of the comparative quarters.

Our cash provided from operations in the fourth quarter of 2013 was approximately $18.2 million as compared with $11.4 million in the fourth quarter of 2012, related primarily to changes in working capital. In the quarter, we had $1.1 million in capital expenditures and recorded depreciation expense of $820,000.

We repurchased 116,000 shares of CTG common stock from the fourth quarter of 2013 and 59,000 shares in the first quarter of 2014. Our current repurchase authorization is for approximately 1.1 million shares. As it remain accretive to our earnings, we intent to continue our repurchase program during the remainder of 2014. Jim?

James Boldt

Thanks, Brendan. In aggregate, revenue declined by 5% in the 2013 fourth quarter with our Solutions business decreasing 11% to 39% of our total revenue. The decline in 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 as well as other reductions in government reimbursements and reduced spending.

On a conference call at the end of October, we mentioned we've received two RFPs for electronic medical record projects for which the hospital had not decided what IT services firms would be awarded those projects. We received one new RFP for an EMR project (inaudible). We have (won one) project with the start-up in the first quarter of 2014, and are still waiting their decision on the other two RFPs as to what IT services firm will be chosen for those projects.

When we started the fourth quarter 2013, we had 15 active EMR projects. During the fourth quarter, there were no projects that started or ended. Therefore at the end of the fourth quarter 2013, we have 15 active EMR projects.

In 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. We've seen hospitals go through cycles like this before where they had to delay capital spending. It occurred in 1998 when the U.S. government balanced the federal budget by reducing Medicare and Medicaid payments. After a period of time the government realized it was beginning to bankrupt smaller hospitals and increased reimbursements.

Again in the first half of 2009 hospitals stopped launching new projects as the tax-exempt bond markets where most hospitals finance their long-term capital is virtually disappeared. When this credit crunch eased, CTG's business recovered. While the market is again constrained in the short-term, in the long-term we still think there is a significant opportunity for growth in our EMR business. There are many hospitals that currently have EMR application and others that have EMR applications will now meet the more stringent standards that are about to being post. There also will be a lot of work required for hospitals that have met the requirements of meaningful use stage one to meet the requirements of meaningful use stages two and three. The health information exchanges will have to be built to facilitate the exchange of records, and we are positioned in Europe to participate in the adoption of EMR when it occurs. Even the work that needs to be done, we are optimistic in the long-term about our EMR business.

Fortunately, for CTG, EMR is not only healthcare offerings and acquisition of etrinity and our other healthcare offerings continue to give a positive impact on our business. We've recently seen an increase in the number of RFPs we were receiving for healthcare outsourcing engagements. In the current tight provider spending environment, we see an excellent opportunity for us in application outsourcing as it creates significant immediate savings for hospitals without them making a large financial investment.

CTG also has an outstanding reputation in this area and these engagements are typically for multiple years, providing annuity like revenue stream. Our SaaS offerings added approximately $0.06 to our earnings per share in 2013 with all that been generated in the first three quarters. We had forecast $0.03 to $0.05 in earnings per share in the fourth quarter from these offerings. However, our FWA client, a small payer concerned about what impact pursuing these clients might have on the relationship with their provider network has not processed the FWA claim, so we identify it.

The current challenge we are facing in the sale of this product is the problems that have occurred with federal and state insurance exchanges with the implementation of the Accountable Care Act. For example, one FWA engagements we anticipated closing in the fourth quarter did not happen because our clients dealing with one of the states with these issues the shutdown of all non-essential projects until they are comfortable to bid changes functioning properly.

Having covered the healthcare, I would also like to talk about the other three vertical markets in which we focus. Our technology service provider market, which is all lower margin staffing business declined in the fourth quarter 2013 based up on a reduction in a significant customers need for external IT resources.

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 was flat compared to the fourth quarter 2012.

Turning to our Staffing business, it's revenue declined by 0.5%, when you compare the fourth quarter of 2013 to the fourth quarter of 2012. The decline in Staffing business from a significant customer I just mentioned was almost totally offset by an increase in demand from other clients.

Looking forward to the first quarter of 2014, we are forecasting total revenue to be in the range of $98 million to $100 million. It's worthwhile to note that there are only 62 billing days in the first quarter of 2014 versus the 65 billing days in the fourth quarter of 2013, and the 63 billing days in the first quarter of last year. We forecast in earnings per share in the first quarter 2014 to be in the range of $0.18, $0.20 per diluted share.

For the 2014 full year, we currently expect a revenue range of $410 million to $420 million or 1% decrease at the midpoint of our guidance when compared to 2013. Based upon our revenue forecast and the anticipated mix of business, we expect our 2014 net income per diluted share to be in the range of $0.90 to $1 per share or 3% increase from 2013 at the midpoint of our guidance.

We thought it would be helpful if we spend sometime explaining how we set our guidance for 2013. For our Staffing business and our traditional IT solutions business, we set the guidance the same as we had in the past and that we only estimated engagements that we are currently working as well as engagements that we anticipate will be signed later in the year. As a technology is similar, we have grouped three of our new offerings together, and we're calling them data analytics.

The three data analytics offerings are big data offering and our two SaaS offerings, which are clinical decision support system for chronic kidney disease (inaudible). For these data analytics offerings, we had only included engagements in our guidance for the year in cases where the client has given us a verbal commitment that they want to proceed, and we're negotiating the contract with the client where we have executed a letter of intent in the project. Currently, we have included in our forecast for 2014, approximately $6 million of revenue for these contracts that are in process and associated earnings per share for these projects were approximately $0.17.

We do believe that we will sell more than $6 million in data analytic services in 2014 that can add accurately forecast this business because these offerings are still in the introductory stage of the product lifecycle. And we don't have enough history to accurately project which opportunities will be closed.

In addition, because there are high margins, a small amount of revenue from these offerings has a large impact on our EPS. If you think about it, it's only February of the year, and in the first two months we sold $6 million of these offerings, twice as much as we sold in 2013. As the year progresses we will adjust our guidance accordingly for additional wins.

As to our quarterly estimates in the first quarter 2013, the government extended the R&D credit retroactively to January of 2012, which increased our EPS in that quarter last year by $0.02 per share. In addition, in the first quarter of 2013, we earned $0.02 from our data analytics offerings and (inaudible) any income in the data analytics area in the first quarter of 2014 as we anticipate that the data analytic projects included in our guidance will begin in the second quarter of 2014.

The data analytic projects included in our guidance we expect to begin the second quarter should increase our EPS by approximately $0.06 per share per quarter present the EPS for the last three quarters of the year to be considerably higher than in the first quarter of the year.

Looking in the revenue guidance for the year, we currently think our healthcare business will decline by approximately 11% in 2014. That assumes that government's reduction in reimbursements will continue throughout 2014 limiting EMR starts, offsetting some of the decline in EMR revenue are expected increases in our revenue from other offerings such as outsourcing ICD-10 and consulting services tied to healthcare reform, where our non-healthcare solutions business were projecting a revenue increase of approximately 3%, we are forecasting a 3% increase in our staffing business in 2014.

We continue to remain optimistic about CTG's long-term growth potential while we are going through a transitional period this time. Longer term, we expect our healthcare business to return the growth as the EMR work is completed. In the short-term, we expect to see growth in outsourcing ICD-10 and healthcare IT consulting work.

In addition, we positioned CTG to participate in the adoption of U.S. packaged software by European hospitals. We are pleased we have already been able to line up $6 million in data analytic sales for the year and will adjust our guidance for further wins as the year progresses.

When we look at how CTG's position in healthcare, one of the world's fastest growing industry, we can see why we continue to be optimistic in our future long-term growth opportunities.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will have a question from Brian Kinstlinger from Sidoti & Company. Please go ahead.

Brian Kinstlinger - Sidoti

Hi. Good morning, guys.

James Boldt

Good morning, Brian.

Brian Kinstlinger - Sidoti

The first question, I think it's -- I was a little bit confused, the data analytics business, how much of that contribute in revenue and earnings in 2013? Did you give those numbers?

James Boldt

No, I didn't. But it was $3 million in revenue in 2013 and $0.06 per share.

Brian Kinstlinger - Sidoti

So, why on twice the revenue -- oh, I am sorry, no, that's okay. So when you say you book $6 million through February for the year, are those new wins you won in January and February? Are you talking about what you won in last year?

James Boldt

No. They actually would have been sold -- the customers made the commitment in January and February of this year. We haven't signed the final contracts with them. But they have -- as I've said they have really given us verbal commitment that they are going to go through with the project and we are actually negotiating the contract with them, or we'd actually gotten a signed memo of intent with the detail of what they want us to do.

Brian Kinstlinger - Sidoti

Can you talk about which price? I mean have you had another, fraud, waste, and abuse win, have you had a new medical IT management win? Could you sort of give us a sense of where that extra revenue is coming from?

James Boldt

Sure. One is actually big data and the other one is fraud, waste and abuse.

Brian Kinstlinger - Sidoti

Okay. And then the customer that is concerned about going after their claims, and have they walked away from the contract? Or are you expecting -- have they given you a timeline of when they might start to go after those claims?

James Boldt

No. The way the contracts are set-up, where we reimburse when they actually receive the money back, so they have to process the claims that we give them, but they are not required to process the claims, and I don't think any payer would kind of contract like that in advance if they have the process deploying whether they agree with it or not. The clients met this (bidding) that we are right, I mean they have pretty much signed off that they were correct that the claims would fall under fraud, waste, and abuse and that there is recovery. They are concerned about their provider network and the impact that will have on them, and they just have stopped and trying to decide what they want to do.

Brian Kinstlinger - Sidoti

And so, have they not decided whether they will move forward at all with going after this, they communicated what's your plan is?

James Boldt

No, they have not.

Brian Kinstlinger - Sidoti

And so how did alter your view of the business in total basically the small to medium-sized hospitals that don't have the Cloud that the larger hospitals had?

James Boldt

Well, it isn't hospitals, its payers.

Brian Kinstlinger - Sidoti

I mean payers. Sorry.

James Boldt

Okay. It has altered our views on -- we are now concerned that smaller payers won't do it. Medium and large payers, we think will do it because the provider actually needs them. Actually the fraud, waste, and abuse, we decided that we try anther market. The fraud, waste, and abuse that I mentioned that we are expecting to sign up shortly, it is included in our guidance, is very large employer with the self-insure plan. And we can think why an employer wouldn't want their money back if there was claims that were paid that shouldn't have been. So we are trying the end-market.

Brian Kinstlinger - Sidoti

Okay. And then, I guess the last question and I will get back in the queue, so I have others. Can you go over, maybe outline for your EMR projects, how you expect them to expire and complete throughout the year? I mean -- and I guess the reason I'm asking that is you have to replace that revenue or there will be more work at those contracts as you move forward?

James Boldt

Well, that's the reason that our healthcare revenues declined. In 2013, we had just over $60 million of EMR revenue. And almost all of them are two-year projects. So we are assuming that $30 million of EMR projects will end. And they are ending because we almost always commit on time and on budget. So they are ending because we did a good job.

Once we finish that project with that client, the client doesn't need our people anymore. We would actually train their people in order to maintain the applications as part of the project. And there aren't as many, and so we are assuming for 2014, which I guess is your question that there will be about $30 million of projects that end. And then, either end we are expecting to see some new projects start with, they are just data project that's starting up on February. So as the hospitals deal with this reimbursement problem, they are not folded to come out of it at once. They seem to be coming out of it separately. And we expect to start some of it, if not that many. So we are going to end it on $30 million on EMR projects and then either through new EMR or we think we are doing a fair amount of outsourcing in 2014 as well as ICD-10 work will get about $15 million in new business, so that the growth is really because there aren't many EMR projects that are stating up.

Let me just take the second because it's actually a good area to talk about, because it's key to our guidance this year and talk about what we see happen in the hospitals and why they still seem to be somewhat (disorient). And I am going to use the old name obviously. But we have a very good well run hospital system. It's over 1000 beds, and after the sequester hit kind of in March and April of last year, they realized that it wasn't going to go away. So they made an announcement in early June that they were going to lay off a thousand people, which is a big deal for a hospital system of that size. But they were going to lay the people off in June and July. Those are going to cause them to lose money in June and July. But by the fourth quarter, the revenue will be back and they would be right in the organization and then will be back to profitability.

When October came, the government put through a new series of rules in order to shift the cost to hospitals and away from the government. I didn't announce why, but I suspect it was in order to be able to fund part of the raw material that we did this. The one that hurt the hospitals the most is called the two (night rule). CMS's position is that there is no reason that a patient ever should be admitted to a hospital for one night. And if the patient is admitted to the hospital, they won't reimburse for it anymore. So this hospital who had actually pointed out they get profitable by the fourth quarter of the year announced in December, because of the changes in the rules They were still not profitable and there were laying off another 250 people trying to be profitable by the first quarter.

So it hasn't been one hit that the hospitals are taking, it has been a series of hits that they have been taking. Some of them like the hospital that's starting up in the first quarter actually kind of related themselves, so they can get their financing recently when we talk into a hospital that literally stopped their EMR implementation mainly because of financing, and is now saying, "Hey, we think we have a financing and we can expect to back up again."

So what we think will happen this year is individual hospitals may start up EMR project, but until the government does something about the reimbursement screen or until they each individually get the profitability back, we just don't see the whole market coming back quickly.

Brian Kinstlinger - Sidoti

Thank you.

James Boldt

Thank you.

Operator

Thank you. Our next question is from Vince Colicchio from Noble Financial. Please go ahead.

James Boldt

Good morning, Vince.

Vince Colicchio – Noble Financial

Good morning, Jim. As the EMR business picks up surprisingly in the second half of the year, and we will say you add -- there is opportunity -- two or three normal sized projects for you guys beyond what you are expecting. Do you have the people you need to do that? How would that play out?

James Boldt

Yes. Actually we refer to some of our competitors in 2013 revenues being down 40% to 50%, so there are people in market, that's not a problem anymore. Almost all of our competitors have set for us -- they have done pretty substantial downsizing. So, getting the people for EMR projects would not be an issue.

Vince Colicchio – Noble Financial

Okay. I know you have did some thinking on new service lines in the healthcare side, have you begun to sort of develop something internally towards that? Do you have an acquisition pipeline or modest foot area that may be in?

James Boldt

We do have people looking for acquisitions whereas some people would be investment bankers. We are very specific though. We are either looking for data analytics type companies or the other area that we think would be of interest would be revenue cycle. We don't have currently a huge book of revenue cycle, we do some. We think that once ICD-10 goes in that there will be a couple of years that hospitals have to spend in really in education, and getting the doctors used to the new codes of the documentations, right, so the coders know to bill the correct amount. So we think once ICD-10 finally hits, that it will be a good market.

Vince Colicchio – Noble Financial

Okay. And what are your current thoughts on the EMR deadline for this year?

James Boldt

Which EMR deadline? I'm sorry.

Vince Colicchio – Noble Financial

When do the October deadline for EMR starts?

James Boldt

Yes. Well, I think that the government may stick with that. I mean if you look at the requirement, it's actually a (jerk). And I am doing this on memory. I don't even have it in front of me. But if you reach meaningful use one, and got the reimbursement from the government in 2011 and '12, then you have to reach meaningful use two in October 1st of '14. If you reach meaningful use in '13 and you have until October 1, 2013 and it kind of goes on like that. So it's the very early adapters that have to get to a meaningful use two this year, not all the hospitals that have reached meaningful use one. So their work will probably spread out over the next two to three years.

Vince Colicchio – Noble Financial

In terms of the analytics software, nice pick up obviously early in the year. Really your sales pipeline of opportunities, looks like versus saying six months ago, is it significantly better?

James Boldt

Yes, the pipeline keeps building. There is no doubt about that. And I think with respect as we already sold $6 million on two months really is an indication of that. The problem really we are having with that is, in our traditional business like EMR business, as an example, 10 customers are telling us that they are going to do an EMR project in the next year. We usually figure maybe half of them will actually start in the next year and those will get 77%. We have been very -- pretty accurate, actually on our quarterly guidance. The last quarter before the fourth quarter of '13 that we were below the midpoint of our guidance was October 2012, closed 12 years ago.

The problem we are having with data analytics is twofold really. One, the guidance is being based upon an individual client's performance and that's a one client no probabilities that's within the forecast. So it's a very narrow focus versus the rest of our business, which is based upon lots of clients. And the other problem and I guess this is also a good part of it is the profitability. I mean for every million dollars in the quarter that we get from data analytics adds about $0.20 to earnings per share. So to be off even $2 million in a quarter makes a huge difference in the company's earnings per share that in line with $0.20 or so.

We truly believe that we are going to land some other data analytic clients this year, but depending on which one we picked, it has a huge impact on our EPS forecast for the year. So we think we are better off to going with what we believe we are going to close based upon our current negotiations with customers and then change our guidance as the year goes on.

And we know by means, we are going to have to change what we have been doing in terms of guidance. In the past, we've tended to wait till the end of the quarter turnarounds when we signed a deal, because we haven't included items if there is anything significant that we closed. We will actually issue a press release when we close it, and most likely we do our guidance for the year.

James Boldt

Okay. I'll go back in the queue. Thanks, Jim.

James Boldt

Okay. Thanks, Vince.

Operator

Thank you. And our next question is from Rick D'Auteuil from Columbia Management. Please go ahead.

James Boldt

Good morning, Rick.

Rick D'Auteuil - Columbia Management

Good morning. So, to get some clarity on the -- what you are calling, data analytics now, so to drill down in the fraud, waste and abuse piece of it, you had a client at the beginning of last year, you signed a new client midway through the year that wasn't supposed to start in the fourth quarter, originally it was supposed to turn I think in the third quarter, but didn't and end with the fourth quarter. That's the one you are referring to that isn't processing the claims?

James Boldt

Correct.

Rick D'Auteuil - Columbia Management

Okay. And then there was a large opportunity that was in the pipeline that you expected to sign formally in the fourth quarter and you may have made a reference to it, but --

James Boldt

Sales are large payer. And that particular payer is involved with one of the states that's still having problems with their exchanges, and basically they shutdown all their non-essential project until they get it worked out. So we were basically put on hold.

Rick D'Auteuil - Columbia Management

And that's not in your guidance at all for this year?

James Boldt

No.

Rick D'Auteuil - Columbia Management

What -- is your expectation that still happens at some point? There are --

James Boldt

The client is still telling us that they want to do it, but it goes back to, if we -- we did back to setting the guidance based upon what we think one individual client is going to do.

Rick D'Auteuil - Columbia Management

Okay.

James Boldt

It's not in our guidance for this year, no.

Rick D'Auteuil - Columbia Management

Is their progress being made with that one state?

James Boldt

Our understanding is yes, but it's still behind where they need to be. Some of the states are actually -- the press has been more focused on the federal exchange obviously. Some of the states will actually hit more problems than the (federal).

Rick D'Auteuil - Columbia Management

Okay. Why would you believe that large payer won't do what the second customer did?

James Boldt

Well, the larger payers are not as dependant on the provider; it kind of flips at some point. This will be considered -- we group them in four groups, so, small payer, medium size payer, large payer and then the mega payers. When you get to the larger payer, the provider needs the payer more than the payer needs the provider. That's our understanding from talking to people in the industry.

One small, 10% physician's practice -- look at a large payer today, we're just not going to do business with anymore, because they are going to lose live customers if they do that. And it doesn't hurt the large payers much as over the small payer.

Rick D'Auteuil - Columbia Management

Have you have been following these (inaudible) Medicare changes that -- I know you guys aren't involved with that, but it relates to CMS and what the government is doing?

James Boldt

I follow them somewhat, and we actually have people obviously that follow on fairly closely.

Rick D'Auteuil - Columbia Management

So, it feels like the providers are pushing back hard with lobbying and having some success?

James Boldt

Yes.

Rick D'Auteuil - Columbia Management

Okay. And then, actually -- and it depends, its two-day role really hammered those guys too. So, is there -- you don't feel the same as true in the non-government reimbursed space?

James Boldt

Well, the biggest changes that have ever heard happened probably to healthcare are occurring now. And so payers, Obama originally wanted a one payer system, right. He didn't want private insurance. And that the payers are having to justify kind of their existence. I mean in the past, the administrative costs and profits are probably for the larger guys, at least maybe 10% on healthcare plus what they process. So, now the pressure is coming under them with these exchanges etcetera to become more efficient.

In the past, they have always looked to reduce their administrative policy, which again is only 10%. The bigger opportunity actually is with them to reduce the payment costs, because if they can do that and get more efficient -- because if they can do that and get more efficient. The reason that the processing plans goes up immensely.

So we still think that there is an opportunity in it. As I mentioned before, FWA, the way we want it, we decide it, we try a different market with the self-insured plan, and being a -- given a self-insured plan, I'm actually using our implication on our own plans. I can't see why a company wouldn't want the money that they paid (inaudible) after that.

Rick D'Auteuil - Columbia Management

Yes, I got that. To drill down more, what happened to client number one, are they still doing business with you or --

James Boldt

Well, they are out there, but this business works really different than the rest of our business. Most of these clients, remember, they are doing an audit, so we might do a year or two years for client and once we are done with that, they collect those claims, they are done making those payments, they may not give us one of the application for another year to --

Rick D'Auteuil - Columbia Management

Okay. I mean, they are obviously billing more -- bidding more claims or getting more claims all the time, but you're saying no, you view it in 12 months increments?

James Boldt

Right. Yes, probably 12 months would be the least. We have been redesigning, actually it's pretty much on our end done, the application, so we can do it more real time as people are processing claims, because the small payers are telling us that if they could catch or we are catching real-time, they are doing adjudication of the claim and deny it as you are processing the claim is much easier itself for them and waiting a year and going back to their customer or to clients or the provider.

Rick D'Auteuil - Columbia Management

And there is a clear way that you get paid on the best scenario too?

James Boldt

Yes, same -- we are telling them it's the same whether we do it by the year or more real-time.

Rick D'Auteuil - Columbia Management

And then there were several other, I think the extra five other that were beta testing, fraud, waste and abuse and we are still in the pipeline, what's the status of those?

James Boldt

Of the original six, we want one, which is one of the ones you mentioned. So that brings it down to five. Two of them told us that they just want to pursue at this time. So they basically said we can come back, we need to run, and the other three we're still pursuing and they are still talking with.

Rick D'Auteuil - Columbia Management

Okay. And there is nothing that would indicate that they are likely going to contribute to 2014 (inaudible)?

James Boldt

Well, two of them are telling us that they want to do something, but they are not to the point that they are saying, yes, go ahead, give us a contract or we are going to do an RFP or whatever. So, there would be significant changes to our EPS, if we put them into our guidance. And we don't want to do that until we get into the point of saying, yes, we are going to do this with you, and give us a time for it and start negotiating.

Rick D'Auteuil - Columbia Management

Okay. And then, ICD-10 still has October 2014 deadline, is that correct?

James Boldt

That's correct.

Rick D'Auteuil - Columbia Management

So what -- your original belief was hospitals were a mess on, and it was going to be a much bigger task than they were contemplating and we're eight months away from that deadline. So what is going on out there as it relate to that?

James Boldt

Well, we have three ICD-10 projects that we are involved in and running. And we have other projects where the hospital said, no, we think can do this ourselves, but we need project managers and client consultants to help. So we are providing people to some of those hospitals as well.

I really don't think that the healthcare system is going to ready by October 1st to do this. I just don't, because I doubt any of the small hospitals have done anything and even some of the larger ones are hoping to get a postponement. When you are still -- because of these additional changes to CMS, I mean -- and I'm just picking the hospitals that they are going for financing. So I happen to know what their numbers are. There are thousands in hospital system that used to be profitable. We probably had a 2% to 3% operating margin before the government started reducing spending, paid loss, $6 million in the second quarter, they lost $15 million in the third quarter. They haven't released their fourth quarter numbers, but everybody thinks we're going to lose money.

Some of the hospitals that we do business with have violated their debt covenant. So we know that they're working with some of the funding agencies to get out of their problem. So when you go and talk to the CEO of the hospital and say, you're going to get killed if you don't have your ICD-10 funds, some of them looking and say, I got to figure out how many payroll, I got to get the bond guys out of here, work out some deal with them.

Rick D'Auteuil - Columbia Management

Okay.

James Boldt

It's a weird situation because we've never been in a situation before both the payers are -- not in jeopardy, but we have a lot of stress under them because of this ObamaCare and the exchanges and everything, and the providers, the government significantly reduced their reimbursement, we're starting to see smaller hospitals fall for bankruptcy. There is one in Western New York, for instance, it's going to close its stores in March, because they just can't handle all these changes.

Rick D'Auteuil - Columbia Management

And my recollection was that ICD-10, if that deadline stays in tact that is very onerous on people that haven't upgraded -- I don't know; hospitals that haven't upgraded to that?

James Boldt

That's correct. We can actually map on ICD-9, ICD-10, because almost all of the ten codes are on explosion of the nine codes. So expense for instance is one code in ICD-9, there is 80 codes in ICD-10. The problem is when you do the mapping you don't have the documentation to prove who did the most expensive code reimbursements. So you have to map to the lowest. So currently they are getting paid (depended) on the average of those eighty. They switch to only getting reimbursed for the lowest reimbursements and models people have run to hospitals that lose at least 3% of their money, their revenues, yes they are mapping to keep themselves going. The alternative is you got to shut the hospital down because you can't bill any money, so it will be terrible. CMS is big in their heels and so far they've said they are going to stick with the date. It wouldn't surprise us quite frankly if we get close to the date and they postponed it.

Rick D'Auteuil - Columbia Management

Well, it sound like -- I mean they have already done that what three times or --

James Boldt

Yes. Three times, yes.

Rick D'Auteuil - Columbia Management

Okay, all right, thank you.

James Boldt

Okay.

Operator

Thank you. (Operator Instructions) And our next question is from Bill O'Loughlin from O'Loughlin Financial Group. Please go ahead.

Bill O'Loughlin - O'Loughlin Financial Group

Jim, good morning, Brendon and Jim as well.

James Boldt

Good morning, Bill.

Bill O'Loughlin - O'Loughlin Financial Group

A three or four comments, if you can be kind enough to clarify, most people on the call probably are not aware that yesterday Governor Cuomo announced that IBM is going to locate 500 people in Buffalo and basically duplicate the Silicon Valley Complex that he has successfully done in Albany, New York. In that article, Jim, this morning, for the benefit of the people who are on the call, the top IBM executive on location who will oversee this big initiative, said this, he said that genomic mapping and medical records are two areas where IBM is doing work, given the fact that CTG is doing genomic mapping and medical records. Can you envision IBM, and I don't see why not, buying CTG, it's only a billion dollar purchase, and IBM could swallow you like a cup of coffee and you can have now their capital, the people, the global means to do what is not happening now. And that's my second questioning. There are seven billion people in the world, 320 million in the U.S., I don't see how with what you are doing with end-stage renal disease on your SaaS system and will also be able to do it, you have the people to do it, coronary heart disease, mental health, diabetes and drug addiction, why you couldn't instantly have a global presence in bringing massive amounts of new business and have your sales force learn to drop what we used to call in the investor business (inaudible) are waiting to do something, but don't do it and learn to just put those people on the backburner and go after all the new business all over the planet that you could have in my opinion, if you have the human capital and the financial capital to do it. Can you give me any thoughts and views on how seven billion people in my opinion would love to hear what you're doing and probably we have no idea in how you might tap into that market in China and India and Europe and South America that I don't think your sales force has any ability to even call in now?

James Boldt

Well, first, I have absolutely no idea (inaudible) or not, and even if I did it, I couldn't comment on it, but there would be just be absolute pure speculation, I don't -- IBM obviously, he has been working on genomic sequencing (inaudible) records. We have actually done that for (inaudible) this is not public, as you know, Roswell Park. So we obviously have capabilities. I'm sure IBM would say their capabilities are larger than us, I honestly don't know, because their marketplace is so small at the moment we've never actually seen enough customer.

We think that the genomics offering is going to be significant over time, particularly the ability to claim the EMR records, and we're probably third in the world in IT services works, electronic medial records and we've already successfully helped the client do genomic sequencing. So we have the right skill sets to be able to do that, and actually we are doing it for the client.

So I think that the opportunity is huge. Our own belief is -- you talked about China etcetera, most of the money being spent, virtually all the money I shouldn't say all, but the vast majority of the money being spent, and genomics is in the United States currently and it's because the state and the federal government are financing research in that area, and also the big pharma companies are also doing research. And we think that the announcement that IBM and EB made long-term first place is great for Buffalo, I mean it's fantastic for Buffalo. But long-term we think that actually would be good for CTG, because if we have used the EB research particularly in the past to develop things like our end-stage renal disease offering. If they can tie in genomics to medical records, then that creates even a more viable database for people to use to develop systems like that to help doctors treat patients with certain diseases. So long-term, probably good for CTG, I don't see why it wouldn't be.

Bill O'Loughlin - O'Loughlin Financial Group

I mean, no news or opinion, Jim, on your initiative with Roswell Park, the local cancer hospital and the genomic sequencing project you are working on. It will hopefully expect a partnership to be announced between Roswell Park and CTG, is there any hope that that will be announced relatively soon?

James Boldt

I really can't comment on that. But the lead in that project as Roswell that isn't CTG; we agreed with Roswell quite sometime ago that any announcement or names would be given by someone in Roswell, not by someone in CTG.

Bill O'Loughlin - O'Loughlin Financial Group

I used to be an IBM representative and the one thing they stressed to us is "Patients is not a virtue." And you have done a terrific job in taking CTG from staffing and to truly a healthcare potential behemoth of a company. But I have to wonder if your sales force works with too few prospects, too long and doesn't learn to drop them and move on to people that were probably be able to sign up in a month, but they know what you were doing. And I have to –- I suspect that maybe the case. They hope that something will happen and ObamaCare stultifies it. Forget ObamaCare, it's a global market. Isn't there something that you could do with a big bang in Europe or other countries with always you are working on that truly could help solve the biggest problems of the world which is healthcare, healthcare cost, truly in many case saved millions of lives of what you are doing. But people don't know about it. And I think your sales force in my opinion needs a good cattle prodder to really get out there and say, look, if you are not going to close these accounts, put them on the backburner and forget them and move on to new fertile ground of businesses that has money around the world that could take advantage of your services.

James Boldt

I don't think that's the issue. Genomic sequencing for instance, you are offering -- we are still waiting for state approval to be able to use certain aspects for that, the reason actually something that we could go out and sell tomorrow. The other offerings are all really new technologies with the end-stage renal disease for instance is exactly what you said. I mean it's the ability for us to be able to put a system in that not only significantly reduce its cost for the payer. I mean it will at least avoid an emergency room visit, which is probably $30,000 to $40,000. Also for the patients, the specialists has the ability to stimulate the neurons and keep the kidneys from failing itself.

So, we have developed things that will do that, but this is brand new technology. No one's ever done that before and we admit that application, our attorneys told us this is the first time anybody patented an application to use human blood work for any kind of a decision support system. So, this is new technology, it takes longer to sell.

Bill O'Loughlin - O'Loughlin Financial Group

But just in conclusion, CTG is on the cusp of greatness. And I don't believe someone like Obama or ObamaCare or the U.S. economy or whatever some budget from some hospital groups or hospital should slow you down. I think your sales force needs to be re-motivated, retooled, rebuild, and probably re-strengthened to say, "Look, we've got to go out and sell this. We've got the answers, some of the greatest medical problems in the world. We are not going to have the patience to wait for those who want to sit and think, let's go out and find people that want to act and do it." And that's my point, is to go out and nobody knows how many losses you have. They only can count the wins. And the wins are evident in sales and earnings. The losses are irrelevant. You just have to go for the win. And I think my own instinct is there is not enough sales people working on enough wins, they're just regurgitating and revisiting those people who think and think and wait. And that's what I'm concerned about as an investor.

James Boldt

Well, in the first two months, the applications you are talking about are at the data analytics.

Bill O'Loughlin - O'Loughlin Financial Group

Right.

James Boldt

In the first two months we sold $6 million; close as much as last year.

Bill O'Loughlin - O'Loughlin Financial Group

Right.

James Boldt

And we haven't included any future wins in our forecast going forward. And we will -- when we get those wins, we'll definitely adjust our guidance.

Bill O'Loughlin - O'Loughlin Financial Group

You know you've done a terrific job with CTG. You're not a salesman, you never were meant to be, you're CEO. But I would really hope that you could revisit the fire in the belly of your sales force and get them to work with more prospects, not fewer and drop it. Let's put on the backburner of those people that want to wait for God knows whatever, that may never materialize. It's a big world and we're global and you could be a behemoth of a company. You could be the salvation of many people's lives. You could be globally known. You could be on the front page of Forbes with what you're doing. And I'm concerned not enough people know about it, but I do appreciate you're listening.

James Boldt

Okay. Thanks, Bill.

Bill O'Loughlin - O'Loughlin Financial Group

Thank you.

Operator

And we do have a follow-up question from Brian Kinstlinger from Sidoti. Please go ahead.

James Boldt

Brian?

Brian Kinstlinger – Sidoti

Yeah. Jim, you mentioned two of your data customers, one going to pursue, what was the reasoning for that?

James Boldt

I'm sorry?

Brian Kinstlinger – Sidoti

You indicated of your six original data customers to -- said, they didn't want to pursue, what was the reasoning behind that?

James Boldt

They actually didn't give us reasons. They basically -- we talked to them for a couple of years. They kind of admitted that we ran samples form. We show how much we could save and they just said, we don't want to -- we just don't want to pursue that at this time. So, they didn't actually give us a reason.

Brian Kinstlinger – Sidoti

Okay. And were they big, small, medium, large or mega?

James Boldt

Large -- or mega.

Brian Kinstlinger – Sidoti

Large, okay. Not mega, just large?

James Boldt

Larger or bigger.

Brian Kinstlinger – Sidoti

Got it. And can you then maybe quantify a pipeline in terms of number, people you are talking to in both (inaudible) and use in medical IT management. Are we talking about 10 or 20, are we talking more like 50 or 60?

James Boldt

I don't actually have the number in front of me. The problem with giving the number out is that if someone -- the way our system works is, somebody goes in and talks with somebody for the first time, it would actually pop us as one. I suspect it would probably be in that range, closer to 20 or even 60, but I really don't know the number.

Brian Kinstlinger – Sidoti

Thanks. And then, have you been able to convince any stage to issue an RFP, I think a while back you've mentioned that state need to have a competitive procurement, have any been convinced?

James Boldt

Not for what we are selling, no.

Brian Kinstlinger – Sidoti

Okay. And then finally, you've mentioned outsourcing contracts is an area that you can grow. I think you are bidding on a couple of large contracts, that you expect it to be adjudicated in January. Did you mention what happened to those?

James Boldt

Yes. We bid and these are big contracts that we would have gotten either in the fourth quarter of 2013 or the first two months of 2014. So, we bid on seven contracts. We won three. Two of the customers told us they're on hold. We're doing the outsourcing because we're doing some other project. We think they're keen to the financing and then they put those projects on hold. So they're going to come back to us and those two and then two wish they're waiting for them to make a decision. So, three they've made decisions to go forward, we won all three of them.

Brian Kinstlinger – Sidoti

Thanks very much.

James Boldt

Okay. Thank you.

Operator

Thank you our final question will come from the line of Vince Colicchio from Noble Financial. Please go ahead.

Vince Colicchio – Noble Financial

Hi, Jim again. Europe grew 5% organically in constant currency. The driver there; was it staffing or was it your EMR client? And then, also on the EMR side, you're starting to see pipeline builders, so, too early?

James Boldt

More of the hospitals in Europe are getting interested, but they're not to the point that they're ready to sign contracts. And part of their problem is they have to get financing or they have to get either financing on capital, but basically state-supported organizations. So, they're going to have most of them, probably they have to go to the state and somehow they are capable to do that. There is very little revenue at the moment from EMR in 2013. Initial contract we got was a consulting contract, just to help them kind of get the project organized and to do some quality checks at the beginning. So there isn't much revenue.

Most of the increase in Europe actually was in financial services, which has been growing. And the other area that's going for them is government, the European Union, it's basically rebuilding Washington DC 200 years later. And most of the growth actually in Europe was in Solution, it wasn't in Staffing.

Vince Colicchio – Noble Financial

Okay. Thanks for the color.

James Boldt

Okay.

Operator

And there are no further questions. Thank you. Please continue.

James Boldt

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

We've offerings to meet the IT needs of providers and payers, including electronic medical records, fraud, waste, and abuse, ICD-10 conversion to accountable care organizations, genomic sequencing, IT-driven medical management models for chronic diseases and Big Data, all of which are expected to be in strong demand for several years. Yes. We remain very 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. And ladies and gentlemen, this conference will be made available for replay after 10:30 today, till February 28. You may access AT&T executive replay system at any time by dialing 1800-475-6701 and entering the access code 306731. International participants can dial 320-365-3844. Again, the numbers are 1800-475-6701, and 320-365-3844, with the access code 306731.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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